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Bonus or Incentive Compensation for Acctg/Finance Execs

Brian Grindem's Profile

What criteria / methods are used to determine bonuses / incentive compensation for Acctg/ Finance execs and staff for private companies?  Stock ownership and formal profit sharing plans are not an option, so I am looking for ideas on how to incentivize the accounting group.  Obviously, setting measureable goals is key, but should those goals be tied to specific projects, company financial goals or both?  If you use company financial goals, which ones do you use (sales, gross profit, EBITDA, etc.).  If you are using financial goals, can that create a conflict of interest (ie. lowering expenses diminishes quality of products or services, which in turn can hurt reputation, sales, etc.)

Thank you for you comments.

Answers

Topic Expert
Malak Kazan
Title: VP, Special Projects
Company: ERI Economic Research Institute
(VP, Special Projects, ERI Economic Research Institute) |

You want to balance the measures between financial and qualitative measures as well as make them relevant to the targeted employee groups so they feel they can "control" / impact the measure. For example, the Order-To-Cash Manager would have potentially two metrics related to improving DSO while increase client retention. Hope this helps.

Bryan Frey
Title: VP Finance/Corp Controller
Company:
(VP Finance/Corp Controller, ) |

First up, bonus is a kind of incentive compensation. So I'm not sure but perhaps you mean bonus vs. commission or some other kind of incentive comp? Regardless, I have a bias for using shared company goals across the team for 50% of comp, and then MBO's, or spcific objectives, for the other 50%. Thus, revenue and profitability against the company's goals would be 50%, and then things like "closing series A financing" or "rolling out new ERP system" would comprise the other 50%.

I don't so much worry about conflicts of interest b/c these people are not operating in a vacuum. Their strategies and tactics are known by, and frequently approved by others. If they were making dumb business tradeoffs, their boss (including/especially the CEO) should see that up front and nip it in the bud.

D. Hill Rose
Title: independent consultant
Company:
(independent consultant, ) |

Perhaps more of a subset of the broader question you're asking ... be sure to have the goals for someone in treasury/cash management to include these measures:

1. Balance control. ... Have both balance levels AND all over-draft charges (per the account analysis). And for balance levels include bal. maintaned, required, and excess/deficit added up on a per bank basis.

2. Total banking costs. ... Convert the balances required to a fee-basis. Include that fee-basis equivalent as part of the budget. ... If you don't a Treasurer is incented to play games. I directly know one Fortune 500 treasurer who saw he was going to be some $200,000 over budget due to needing to pay bank fees (because the cash manager was doing such a good job controlling balances). Because fee-equivalent amounts were not in the budget he had the balances increased to multi-million dollar levels so no fees would need to be paid that quarter.

I can share with you the full "report card" for a treasury/cash manager if you're interested.

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