A client recently asked me about how best to structure an incentive compensation plan that also protects the company’s interest. If you’ve been following and listening to my videos, you know that I’m all about cash flow and profitability, so this video talks about how to create successful incentive compensation plans with an eye on the bottom line.
There are 2 considerations:
1- Make sure any bonus calculation is based on cash collected, not just an increase in revenue or sales. You don't want to obligate yourself to a cash outlay until and unless the related cash inflow has occurred.
2-The calculation should be based on an average over a period of time, instead of at a certain point in time. For example, instead of measuring sales at quarter end, measure average monthly sales over the previous 3 months. What you are looking for is a trend towards the behavior you are trying to incentivize, and that can only be measured over a period of time