TORONTO--(BUSINESS WIRE)--Chartered Professional Accountant, Rodney Davis of GreySuits Inc. a strategic accounting firm was interviewed about how business leaders can work with finance to determine compensation, how to measure employee performance and determining bonuses.
Q: Let’s start with a fundamental question. How do you determine if an employee is worth their salary?
Rodney Davis: That can be a subjective conversation point, but it doesn’t have to be. The job of a good finance person is to isolate the cost components and understand how they affect the bottom line. Evaluating the cost of labour is no different than the cost of a supply input where you evaluate the profitability of a product or service to understand to what extent the cost is controllable or not controllable.
Q: How do you financially measure their performance?
Rodney Davis: You have different measurements for different job functions. Our job is to assess an individual based on their inputs and outputs as well as the controllable and uncontrollable factors. For a salesperson, you can measure how many leads they get, how many people they convert, how long it takes them to convert, their average sale value and so on. In the case of marketing, how much money did you give them to spend? How did that translate into dollars earned? For manufacturing, how many units came down the line? How many of those units came out defective? The baseline of every good budget has two components. One is revenue and cost of goods sold associated with that revenue. And the other is staffing. In any good budget, staffing is a completely separate component broken down to the associated costs with each of those positions. So, when finance is having that conversation at the management level, they typically speak in terms of the staffing costs and how those translate as a percentage of the organization. And of course, they’ll provide metrics against those same functions in other organizations, so that you're having a real conversation about the effectiveness of that team.
Q: And what metrics should be put in place to help entrepreneurs determine bonuses?
Rodney Davis: I tell all my clients, if you can't calculate bonuses, then there's something wrong with your compensation plan. The right bonus levels should be tied to the target compensation for that position. Target earnings is one option. I determine the target compensation for an executive is $100K and I want their compensation to be consistent with the industry, which is 80% fixed and 20% variable. I might give them an $80K base salary with a bonus objective of 25% as a target. We have an upside that's tied to overperformance or a ratchet tied to underperformance. I don’t recommend making it all-or-nothing, because if you're 80% into the year and you know you're not getting your bonus, you may take your foot off the gas. If there’s something at stake, you'll keep working hard. The other is this: A company has a return requirement of X. If they make that return, then the pre-bonus is higher and they could agree to give management a share of everything above that target. In that case, the sky's the limit.
If your executives can calculate your compensation plan, you're invariably going to find they’ll perform better. They know the rules and where the goalposts are and can determine how much effort is needed to get there.
Rodney Davis, CA, CPA is a partner and practice leader at GreySuits Advisors Inc. He has been working with private and public organizations since 1990 in change management.
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