How to Structure Employee Bonus Plans

How to Structure Employee Bonus Plans

Insight from Jim Schleckser 

Let’s talk cold hard cash 💸

How to set up a cash bonus plan to attract and incentivize high-performers?

First, we need to calculate the bonus pool size. For startups, a common benchmark is to set aside 10-20% of capitalization for employee equity + compensation.

For larger companies, we’ll want to set aside a percentage of profits.

Next, we’ll need to choose a distribution strategy we’ll use to divvy up that pool.

There are two common ways to structure bonus compensation. The first is as a % of base salary, and the second is based on role/contribution. The first is more straightforward, while the second requires a little bit of creativity on your part.

If we’re using the more straightforward structure, a good benchmark is ~11% of base salary.

If you’re tiering bonus distribution based on role, think of the cash as a pool of shares. 

To use a simplified example: If you have a $100k pool, you can divide it into 20 “shares,” and distribute those $5,000 units across your team based on role. Your CFO might qualify for 5 shares while a more junior member might qualify for 1.

There are a hundred ways to slice it, but we thought we’d cover the basics and benchmarks.

And, if nothing else works, throw a quarterly pizza party. Everyone loves pizza 🍕

Learn more: How to calculate bonuses based on shares