Incentive bonuses can help in getting managers to focus on profitability, but make sure that you use the right measure. Otherwise, you may inadvertently sent the wrong signal to managers and miss out on important profit dollars.
Many companies tie incentive bonuses to gross profit margins. That's fine, provided you want managers to concentrate on selling products or services that return the greatest profit per dollar of sale. The downside is that they may neglect the easy, but low-margin, sale.
To avoid that pitfall, Mississippi Management Inc., which operates hotels and motels, gauges its managers' performance by tracking their gross profit per available room (the standard unit in the hotel business). If the company tracked gross margin instead of gross profit, managers would be encouraged to sell more rooms, which are high margin, and discouraged from making, say, additional restaurant sales.
"Those other sales may lower margins, but they add profit dollars," says MMI controller Mickey Brady. So if you want maximum profit, not maximum margins, give managers a performance measure that doesn't penalize them for picking up those extra profit dollars in low-margin sales. Gross profit per square foot, or per hour of operation, might do it in your business.