Your Bonus Plan Is Something a Buyer Will Read

A buyer reads your compensation plans in diligence to answer a single question: does this plan pay people to do what an owner would do, or does it pay them to take what they can while they can? A plan that passes is one a buyer can keep. A plan that only works because you override it a couple of times a year is one more thing that walks out the door with you.

How pay is earned matters more than how much

Owners usually look at the size of the number first. That is rarely where the problem is.

A manager who is underpaid will tell you. A manager whose plan quietly rewards the wrong thing will not, because from the inside they are simply doing well at what the plan measures.

Pay on this quarter’s billings and revenue gets pulled forward out of next quarter. Pay on gross margin with no view of collections and you get margin on invoices that never turn into cash. Pay on new logos and nobody protects the renewals. Nobody in that building is behaving badly. They are responding to the instrument you handed them.

So the question to ask before you change anyone’s pay is not “what should the number be?” It is whether the plan protects the long-term interest of the company or encourages a manager to grab what they can while the window is open.

Why a buyer cares

Buyers are not just pricing what the company earns. They are pricing the people who will still be there after you leave, and the incentives those people are working under.

A plan that rewards the right behavior tells a buyer the results are repeatable, because they come from a design rather than from your attention. A plan that rewards the wrong behavior tells them one of two things: either the earnings were inflated by pulled-forward revenue and soft collections, or somebody has been quietly correcting the plan’s side effects by hand. Neither survives diligence well. The first shows up when a stranger recalculates your earnings. The second leaves with you.

A higher target is not a plan

Raising the bar for the people you already have is a legitimate move. It just does not work on its own.

Tell the sales team the number is up by half this year and somebody who has been there a long time will ask the obvious question: what are we getting? A territory nobody covers, a new list, someone to handle quoting so there is more time to sell, a price they can actually win at. If the honest answer is “nothing changes except the number,” everyone in the room already knows how the year ends.

What they are too polite to say is that if they could have hit that number with what they have, they would already be hitting it.

An expectation either arrives with something attached or it arrives as pressure. The something can be money, a process that makes the new standard reachable, training, or another pair of hands. Without any of them, you are asking for a different result from the same inputs. When capable people then deliver roughly what they delivered last year, owners often conclude the people were the problem. The plan was never tested; only the people were.

What a fixed plan looks like

Illustrative. Yolanda owns a civil engineering firm with five project managers, each paid a bonus on the fees they billed. Billing was strong. Collections were not, and two project managers routinely ran over budget on fixed-fee jobs to keep their billable hours up. Yolanda smoothed it over every year by adjusting bonuses at her own discretion.

Her first plan before selling was to raise the bonus pool to keep her best people through a transaction. It would have made the problem bigger. What she did instead was change what the bonus paid for: fees collected rather than fees billed, with a share tied to the project finishing within budget. The first year was uncomfortable. One project manager left. The other four adapted, and the firm’s realization rate climbed.

By the time a buyer reviewed the plans, there was nothing for Yolanda to explain, because nothing depended on her overriding anything.

Depth you do not have to hire

The cheapest management depth available to most companies is not an employee. A small group of outside advisers, three or four people who have run something larger than yours, meeting on a fixed schedule and shown the company as an insider sees it, will tell you things nobody on your payroll can afford to.

The value is less the advice than the discipline: decisions start getting made against an outside standard, in front of people who will ask about them next quarter. That is the same discipline a buyer tests for.

What a thin or mis-paid team costs

A buyer who likes the business but doubts the team prices that doubt three ways. Lower, because the earnings may not repeat. Slower, because every diligence question routes to your office. And later, because more of the price becomes contingent on results the team has to deliver after you are gone. Why that structure is so expensive for a seller is covered in if every decision comes back to you, a buyer will make you pay for it.

Building a team takes longer than anything else on the list, and it cannot be compressed at the end. Nobody becomes a general manager in the ninety days before a letter of intent.

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This is what we do. Prism Edge reviews how your managers are paid against what you actually need them to do, redesigns plans that reward the wrong behavior, and builds the team structure a buyer will be willing to keep. That way the results you report are results the company produces, not results you correct by hand.

The full chapter on the management team, including how one owner moved a loyal eleven-year manager without losing them, is in Enhancing Your Business Value, free to download here.