Can you explain how the company result becomes a bonus someone can earn?
An unexplained year-end bonus leaves people guessing about what mattered. A clear annual pool gives the company and its participants a shared calculation, an understood opportunity and a way to review what happened.
Start with the promises already made and the financial work supporting them. This milestone establishes the company plan and its administration. M23 develops each leader’s individual annual agreement.
Choose and define the funding result
The iBD starting recommendation is normalized operating income, which brings revenue, delivery costs and operating expenses into the same conversation. Define the actual source line, period, included costs, approved adjustments and treatment of depreciation. State whether the calculation starts before or after bonus expense.
A normalization needs support and an agreed reason. It cannot quietly remove an ordinary cost because that cost reduces the award. Discuss how approved investment and decisions outside a leader’s authority affect the measure.
In a hypothetical plan, $1,000,000 of operating income before annual bonus expense funds a 10% pool of $100,000. Recognizing that full amount as expense leaves $900,000 before additional employer costs not already included. A different basis produces a different calculation. The 10% rate is an illustration, not a benchmark.
Separate funding, allocation, earning and payment
| Stage | What it tells you |
|---|---|
| Funding | The company-level amount calculated under the plan. |
| Allocation | The opportunity designated for a person, group or reserve. |
| Earning | The award supported by eligibility, agreed conditions and actual evidence. |
| Payment | The amount paid under the terms and what remains owed. |
A 15% allocation of that hypothetical $100,000 pool creates a $15,000 opportunity. It does not mean 15% of salary or an automatic earned award.
Account for every share, including the broader team and unawarded reserve. Explain combined roles, owner-held roles, vacancies, entry/departure dates and part-year service. A vacant role does not require an imaginary employee or automatic distribution of its share.
For the team allocation, compare equal dollars, eligible-pay proportions or a defined contribution approach. Explain the choice and eligibility. A hypothetical $25,000 team allocation divided equally among 25 eligible people is $1,000 each only if the terms make that full amount earned and payable.
Test what happens away from the target
Test the funding rate, allocations, thresholds, performance adjustments and maximums as one calculation. If a plan uses a threshold, inspect results just below, at and above it. Include loss periods, a vacant role and mixed performance across functions.
Suppose the hypothetical company’s qualifying earnings rise to $1,200,000. At 10%, the pool is $120,000. Multiplying every allocation again by 120% creates $144,000 of proposed awards. That exceeds the pool by $24,000. Decide deliberately how performance enters the calculation and how the total is funded.
Work with finance through the approved budget and a supported downside scenario. Include compensation once, with employer costs and appropriate expense, obligation and payment treatment. Keep earned but unpaid amounts distinct from unawarded reserve.
Profit and cash are different. Collections, inventory, investment and debt payments can change what cash is available. Review the actual payment months in the connected financial statements. The SEC’s financial-statement guide explains that distinction.
Prepare your compensation overview
Use the Compensation Blueprint™ to summarize the company pool, annual agreements and long-term participation. Its static two-page PDF also has an editable PowerPoint version. The blank uses 2027–2031; adjust the starting year and every column together for your planning period.
You can begin in existing company records:
- Record the company, period, proposal/adoption status and exact financial source.
- Define the pool basis and calculation. List allocations, eligibility, reserve authority and the agreements governing awards.
- Connect each actual person’s role, base pay, target opportunity and performance terms. Keep planned future roles identified.
- List existing and proposed long-term arrangements separately, including the value, vesting and payment terms still to resolve.
- Name the unresolved decision, person responsible and next review.
The Annual Bonus Pool Plan develops funding and monthly administration. The Annual Compensation Plan develops individual terms. The overview links to those records; it does not replace the model or amend an agreement.
Adopt, explain and actually administer the plan
Set earning conditions, approval authority and payment timing with appropriate payroll and legal review. Preserve existing commitments while considering changes. A cash shortfall belongs in the funding discussion; it is not an assumption that an earned obligation disappears.
Explain the applicable terms to participants with a realistic example. Record the actual discussion, questions and remaining issues. Share the performance information people need without circulating private pay or owner records.
Then use one closed month. Reconcile actual results, the current annual estimate, allocations, earned/unpaid amounts, payments and reserve. Record a supported decision or continuation, its owner and the next review. A rehearsal prepares this work; it does not establish actual administration.
What completion looks like
The company has a supported, adopted and communicated pool, with one completed closed-month administration review and continuing responsibility. No compulsory payout or full year of payments is required. Zero payout under an active plan is different from having no plan.
Open the seven completion requirements
1. Define a calculation someone can reproduce.
Purpose: The funding basis is defined and reproducible.
Question: Can someone trace the stated funding basis to the financial records and reproduce the result?
Evidence: The period, source line, pre/post-bonus basis, included costs, adjustments, rate and calculation reconcile to maintained financial records.
2. Agree who participates and how the pool is divided.
Purpose: Allocation and eligibility are explicit.
Question: Who participates, how much is allocated, and what happens to vacant or unused shares?
Evidence: The plan accounts for all allocations, combined/vacant roles, partial-year eligibility, the company-wide share, reserves and unearned amounts. Authority to award or reallocate is recorded.
3. Test the financial commitment.
Purpose: The combined economics and payment needs are supported.
Question: What does the plan cost and when must cash be available, including a difficult year?
Evidence: Reviewed budget and downside scenarios show expense, employer costs, obligations and payment timing once, with supported working-capital, tax, debt and investment needs. Any dependency that could invalidate the promise is resolved before adoption.
4. Adopt clear earning and payment terms.
Purpose: The earning and payment terms are adopted.
Question: Which actual terms determine earnings and payment, and have their boundaries been tested?
Evidence: Authorized terms define any thresholds, performance adjustments, maximums, approvals and payment timing, with appropriate payroll/legal review. Calculations have been tested at and around relevant boundaries.
5. Explain the plan to its participants.
Purpose: Participants understand the applicable plan.
Question: What was explained to participants, and which questions were resolved or left open?
Evidence: A real communication and questions record, with an example explaining the company result, eligibility and own opportunity. Relevant shared performance is visible without compulsory disclosure of private compensation or ownership data.
6. Use one actual closed-month review.
Purpose: The company has administered the plan using actual results.
Question: Which closed month was reviewed, what reconciled, and what decision followed?
Evidence: One completed closed-month review reconciles actual results, the current annual estimate, allocations, earned/unpaid amounts, payments and any reserve, and records a supported decision or continuation. A rehearsal alone does not count.
7. Assign continuing responsibility.
Purpose: Continuing maintenance is assigned.
Question: Who maintains and approves the plan, and when are the next monthly and annual reviews?
Evidence: A named maintainer, review/approval authority, next monthly review and annual renewal process linked to the existing budget and meeting rhythm.
Review the milestone-specific 0–3 score and evidence test
0 (Not Started). No defined company-wide annual bonus-pool work or supported review is in place.
1 (Learning). You can explain how the funding basis, allocations, individual award conditions and payment timing differ, and identify the information needed to design your company’s pool. A supported company plan has not been prepared.
2 (In Progress). Substantive pool design, reconciliation or implementation work is underway, but one or more of the seven requirements remains incomplete.
3 (Installed). All seven requirements are met: the company’s pool and terms are supported, adopted and communicated, and one completed closed-month review demonstrates their actual administration, with continuing responsibility and review assigned.
Verification test: use the adopted plan and one actual closed-month review to trace the funding basis, allocations, earned and unpaid amounts, payments and reserve. Explain the relevant financial constraints, the decision made and who maintains the next review. Inspect the supporting evidence for all seven requirements. No recall timer or compulsory payout is added.
Use suitable existing work. Record each requirement as complete, incomplete or not reviewed, with its evidence and date. You choose the saved score; keep owner, peer, coach and AI assessments separate. Unreviewed evidence is not automatically zero. Preserve prior reviews and identify the next action, responsible person and review date.
Keep the plan understandable as results change
Keep the plan and protected agreements in The Numbers / Executive Compensation. Finance maintains the calculation; leaders supply performance evidence; authorized people approve awards. Dated discussions and decisions connect to The Rhythm.
Review actuals and estimates monthly, consequential changes quarterly, and next-year terms during annual planning. Preserve the approved budget and the terms for each period when forecasts change.
Explore the company funding decision
- 493. How to Tie Everyone’s Compensation to Your Ownership Goals, with Ryan and Kim: connect ownership direction, company funding and annual participation. Use the current written requirements and your actual terms.
- 453. From Chaos to Cash, with Jennifer Davis: connect expectations and the compensation conversation.
- Annual Bonus Pool: distinguish the funding calculation from an earned award and cash payment.
Choose your next step
Review the wider system. Use the Ownership Assessment to consider this capability alongside your goals, numbers and leadership work. Choose a useful priority from the evidence.
Bring the plan together with support. The 90-Day Boardroom Blueprint connects ownership direction, the financial foundation and decisions in a first usable Playbook. You can explore support directly.
← M21: Leadership Development · Module 8 · M23: Short-Term Incentives →