Author: Khatia Giorgobiani
Bonuses as a Strategic Tool: Insights from Grant Thornton's Research
For companies, bonuses are not merely a tool for individual incentives, they also play a crucial role in shaping strategic decisions and financial outcomes. The fairness and effectiveness of bonus structures are often debated, as well-designed compensation models contribute to sustainable business growth, whereas poorly structured incentive systems may introduce financial and operational risks.
Grant Thornton's Business Advisory Department conducted a study addressing key questions: How do company size, revenue, and profitability impact bonus structures for executive management? What are the differences across industries?
The study was conducted across Georgia and is based on quantitative data and expert interviews, analyzing financial factors influencing bonus structures and industry professionals’ perspectives. The analysis relies on a theoretical approach that identifies three primary methods for determining bonuses: a combined bonus formula, an EBITDA-based bonus formula, and a progressive bonus structure.
Analysis of Bonus Distribution Practices and Alternative Compensation Methods
A quantitative analysis of director bonuses reveals a clear correlation between a company's revenue and its bonus distribution strategies. Companies with high revenue (over 200 million GEL) typically allocate a smaller proportion of their revenue to bonuses (0.1%-0.2%) and a more moderate share of their net profit (1%-5%). From the other side,, companies with lower revenue (under 50 million GEL) allocate a significantly higher share to bonuses (1%-2% of revenue and 10%-15% of net profit). Mid-sized companies (50-200 million GEL in revenue) tend to set a higher bonus proportion (5%-10% of net profit), reflecting a more flexible compensation policy. These trends indicate that small and medium-sized businesses link bonuses more closely to performance-based incentives, shaping their financial policies accordingly.
The primary metrics used to determine bonuses for directors include revenue, EBITDA and net profit. Some companies employ a combined approach, where bonus payouts depend on both revenue and profit.
On average, companies allocate between 0.1% and 1% of their revenue to bonuses, while profit-based bonuses range from 1% to 15%. These findings align closely with the quantitative analysis of mid-sized companies, reinforcing the observed trends. These figures highlight a consistent approach among organizations in aligning bonus distribution with financial efficiency metrics, ensuring a balanced and performance-driven incentive structure.
Frequency of Bonus Payments and Best Practices
An examination of bonus payment schedules shows that organizations typically disperse incentives on quarterly, semi-annual, or yearly cycles, each having a unique impact on employee motivation and company results.
Best practices suggest that companies should conduct a comprehensive review of their bonus systems annually. Periodic adjustments should be made in response to significant changes such as mergers, economic shifts, or strategic realignments. This proactive approach ensures that bonus structures remain aligned with long-term strategic goals and adapt to dynamic business environment.
Alternatives to Bonus Systems
Companies that do not provide bonuses often adopt alternative compensation models such as overtime pay, a 13th salary, commissions, and professional development funding. These alternatives offer structured financial incentives and career growth opportunities for employees. Funding professional courses and certifications helps enhance employees’ qualifications and fosters greater loyalty. While such approaches may not provide immediate financial benefits, they can significantly boost motivation and organizational performance in the long run.
Conclusion
The study’s quantitative and qualitative analysis underscores the significant role of bonus systems in executive compensation management. Data reveal that bonus distribution practices vary considerably based on company revenue levels and industry specifics. Companies with high revenues allocate a relatively small share to bonuses, whereas medium and small businesses tend to allocate a higher percentage, particularly in relation to net profit.
The research also highlights that structured bonus systems are more prevalent in financially stable organizations, while mid-sized and small businesses often adopt more flexible, discretionary bonus models. Notably, different companies rely on various bonus determination methods: some prioritize net profit, others revenue, while some focus on EBITDA. The study indicates that mixed approaches, such as combined bonus formulas or EBITDA-based bonus models, provide a more balanced and equitable compensation structure.
Additionally, companies that do not grant bonuses often implement alternative incentive mechanisms, such as professional development funding, a 13th salary, paid overtime, and commission-based systems.
The findings of this study emphasize the importance of regularly reviewing bonus structures in response to changing business environments. Organizations should recognize that an effective bonus model is not just a motivation tool, it is a powerful mechanism for supporting corporate objectives, maintaining financial stability, and strengthening organizational culture.
