Bonus Pool Tied to EVA, Not Revenue

“The bonus pool The bonus pool is the total amount of cash available for distribution at year-end in the form of bonuses. It’s also called the size of the pie, and is a function of the company’s Economic Value Added: Pie = EVA * X% EVA = Nopat – Cost of Capital Where: Nopat = Net Operating Profit After Taxes Cost of Capital = Invested Capital * WACC Invested Capital = Operating Assets WACC = Weighted Average Cost of Capital To get the potential bonus per employee, which is usually a multiplier of the employee’s monthly salary, we divide the pie by the company’s monthly payroll: Potential Bonus = Pie / Monthly Payroll We then know that the available bonus is, for instance, four months’ salary for each employee; but the actual amount earned is given by the employee’s performance scorecard. So if the potential bonus of a given manager is 4 monthly salaries and his overall performance score is 150%, he’ll take home 1.5 x 4 = 6 monthly salaries.”

“We already know that the Individual Performance index is a function of the employee’s goal attainment scorecard. Team performance, as we’ll see in further detail on the goals chapter, is how the team, as defined by everybody that reports to the same manager as someone’s, fared relative to its goals. If everyone makes their numbers, the team will have – usually - made its numbers, because individual goals are unfolded from collective goals, which are themselves broken down from firm-wide goals. Firm-wide goals follow the same logic. So it doesn’t matter if the individual had great performance for the year despite her sorroundings: she will be punished if the team doesn’t collectively make its goals, and the same goes for the firm. The idea is to align interests between rank and file employees, executives and shareholders. After Team Performance and Company Performance are assessed, the employee’s overall performance index can be calculated by a simple multiplication of the three scores: The overall score will dictate how much of the potential bonus the employee will take home.”