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Planning for Profit Payouts

March 25, 2016
Formula-free FP&A

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After wrapping up the 2015 financials, many companies are preparing payments for bonuses and profit shares. It’s one of the few times that it’s actually fun to cut big checks since it’s a celebration of your company’s success.If you’ve been on target with your budget and accruals for bonuses, the expenses were taken back in 2015. But if they were short, you’ll be taking a knock against your 2016 income statement. The importance of it is obvious but what might not be so obvious are some things you can do to mitigate the risk of having it happen again in 2017.Salary BonusesSegmenting the individuals participating in the bonus program from non-eligible employees is always the first step. Sometimes the selections are made through business roles, performance ratings or consist of complete departments.Consider these aspects -

  • The gross revenues or net profit of the full company, division or department are the main drivers used to calculate the amount of money you’ll put into your bonus fund.
  • You’ll set minimum and maximum thresholds as the parameters for the amounts able to be earned by any one group or individual.
  • Key Performance Indicators (KPI’s) gauge the measure of success of the individual and their values determine the expense amounts that you allocate to different departments.

Profit Shares / Contingent CommissionsRewarding business partners for choosing to work with your company is a long-standing practice in many organizations. In the Insurance industry these incentives are referred to as Contingent Commissions. They’re a good example that can be easily extrapolated to other situations.Contingent commissions are frequently paid by Insurance Carriers to the Producers they work with and reflect the amount of ‘good’ business that they’ve brought to the company.

  • Earned premium is the primary factor in calculating commissions. Booked premium is recorded as policy contracts are executed while earned premium gets recorded when payment has been made and the coverage period has started.
  • Claims incurred is the main expense consideration. Insurers distinguish between claims that have been reported or are anticipated (such as from a tornado) and those that have been physically paid out. The loss ratio is the KPI where claim amounts are compared with premium.
  • Other factors considered in many Contingent Commission contracts are year-over-year growth, reinsurance ceded premium and commission, as well as Producers achieving specific milestones.

Mitigating Your Expense RiskInsurance itself is the perfect example of mitigating the risk of expensive events devastating any one individual, family, or company. The same concept applies when you want to reduce the risk of your bonus payment and profit share expenses hitting your books in the wrong year.

  • Set up your report layouts for each unique contract and segment your Producers into tiers or groups that have similar contracts.
  • The values and KPI’s should be pulled directly from your master budget plan so you never have to worry about typos or formula errors causing your premium dollars or your claims amounts to be inaccurate.
  • Salary Bonus programs work in the same way. Pull the indicators you need into a Wage Bonus Report that you create to match your specific program. Have the report populate automatically with the salaries of the individuals or groups that participate in the program, any multipliers needed, and tie them to the KPI’s. Then let the report do the work for you. By using monitoring tools, such as Analytics Maestro, you’ll import the actuals from the GL and populate the remainder of the year with your forecast and you’re ready to determine if any adjustments need to be made.

Planning, monitoring and revising your expense expectations are critical to the success of your business. Using business budgeting and planning software, such as Budget Maestro, is an ideal way to perform those functions. Custom reports that are set with the indicators and KPI’s that your company focuses on allows you the control you need to best manage your expenses.How can you open up your thinking and find ways to increase the efficiency and accuracy of your profit share and bonus planning?

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