A manager's bonus should be tied to what the manager decides
25 October 2026, 08:57
Variable pay is the part of a salary that depends on targets set in advance, usually in the year's budget: it is paid if the target is met and is reduced, or disappears, if it is missed. In SMEs it often applies to sales directors, area managers and salespeople. In an interview with the NZZ am Sonntag, reported by Reuters on 24 October, the chairman of Lindt & Sprüngli, Ernst Tanner, said that this year targets had been missed in Germany, Switzerland and Austria and that bonuses in those countries would be affected. At Lindt prices are not decided by the Swiss headquarters: according to Tanner, each national manager runs their market «including pricing». The missed target therefore also depends on prices chosen by the people whose bonuses are now being cut.
A bonus tells the person who receives it what matters to the business
Anyone whose bonus is tied to a number takes the decisions that make that number grow. That is the purpose of variable pay, and it is also its risk: if the number chosen does not follow what the business earns, people work well towards the wrong target.
A frequent case is the bonus calculated on turnover. A salesperson measured on sales has every reason to grant a discount to close an order, and to push the items that sell most easily, which are often the ones that earn least. At the end of the year turnover has grown and the bonus is paid, while profit may have fallen. In that case the business has rewarded sales, not profit.
The target is measured on what the person decides
The first criterion is that the target should depend on the choices of the person who receives the bonus. An area manager who sets prices and discounts is answerable for two things at once: how many units are sold and how much the business earns on each one. Often one of the two grows at the expense of the other: a discount increases the quantities and reduces the earnings per unit, a price increase does the opposite. A target that looks at only one of them rewards whoever sacrifices the other.
The measure that holds them together is the contribution margin of the customers the area manager looks after: the sales made to those customers minus variable costs, that is, what the business spent on the materials and goods it sold, plus commissions. To calculate it customer by customer, the cost of each item sold is needed. For a trading business it is the purchase price of the goods. For a manufacturer it comes from the costed bill of materials, the list of the materials that go into each product, with the quantity and value of each. With the cost of each item, every sales invoice shows how much is left for the business after the materials, or the goods, and the commission.
The second criterion is that the target should not depend on items the person does not control. If an area manager's bonus is tied to the profit of the whole business, it rises and falls with the rent on the head office, the interest on loans and taxes, none of which the manager decides. It arrives or fails to arrive for reasons that have nothing to do with the manager's choices, and stops guiding them.
The typical mistake is to discover at the end of the year that the target rested on a wrong forecast
Targets come from the budget, which in turn rests on forecasts: how many customers will stay, at what price they will buy, how much materials will cost. According to Tanner, Lindt had relied too much on market tests suggesting that customers would pay €12.95 instead of €9.95 for a pack of Lindor chocolates. In Germany and Switzerland that forecast proved wrong. If results are only looked at at the end of the year, the business finds out once the financial year has closed, and the bonus that is not paid does not bring back the lost sales.
Controlling is there to see it sooner. Every month the quantities sold, the prices charged and the contribution margin of each customer are compared with the budget. When the variance repeats month after month, the forecast does not hold: prices are revised and, if necessary, the target too, without waiting for the annual accounts.
To find out whether bonuses follow what the business earns, the starting point is the list of those paid in the last two financial years. Next to each one goes the number on which it was calculated and, for the same period, the contribution margin of the customers or products it refers to. If a bonus has grown from the first year to the second and that figure has not, the target has rewarded decisions that did not pay off for the business.
This article was prompted by a news item published in Reuters on 24 October 2026.