The Bonus Trap Most Founders Fall Into
Team Bonuses can be powerful. They motivate teams, reward hard work, and build loyalty.
But if not structured properly, bonuses can backfire—eating into profit, rewarding the wrong behavior, or causing resentment between departments.
So how do you declare bonuses fairly and profitably?
The answer lies in using two key metrics: dLER (direct labor efficiency ratio) and mLER (management labor efficiency ratio). These simple tools ensure your team only earns bonuses when they actually outperform—without blowing your salary cap or hurting the bottom line.
Step 1: Set Clear Targets for Gross Profit and Expenses
Start by defining your target gross profit margin and overhead spending.
Here’s a model example of a business doing $10 million in revenue:
| Category | % of Revenue | Amount |
| Revenue | 100% | $10,000,000 |
| COGS (Labor) | 35% | $3,500,000 |
| Gross Profit | 65% | $6,500,000 |
| dLER | 2.86 | |
| Overhead Breakdown: | ||
| Marketing | 10% | $1,000,000 |
| Sales | 5% | $500,000 |
| Management/Admin | 10% | $1,000,000 |
| Technology | 7% | $700,000 |
| Other | 2% | $200,000 |
| Total Expenses | 34% | $3,400,000 |
| mLER | 6.5 | |
| Net Income | 31% | $3,100,000 |
With a 65% gross profit margin and 31% net income, this company is in a strong position. Now, it wants to incentivize its production team to improve gross profit. If the team performs better—say, hitting 70% gross profit—that extra 5% becomes a bonus pool.
Step 2: Use dLER to Bonus Production Staff
dLER = Gross Profit / Direct Labor Cost
This tells you how productive your production team is. If the team exceeds the 65% gross profit target, you can reward them with part (or all) of the extra margin.
Example Bonus Pool:
- Target gross profit: 65%
- Target dLER = 2.86 (anything above can be bonused)
- Achieved: 70%
- Extra profit: $500,000
- Number of staff: 35
- Average salary: $100,000
- Bonus per person: $500,000 ÷ 35 = $14,285
This model is simple, scalable, and ties bonuses directly to margin—not effort, hours, or attitude.
Step 3: Add Project-Level Tracking and Utilization
But what if only some projects outperform? Or only some staff carry the weight?
Then you need to track bonuses at the project or job level. That’s where utilization comes in.
Why Utilization Matters
Let’s say a team member earns $100,000/year—but only 80% of their time is billable. That means:
- $80,000 is billed to clients
- $20,000 is unbilled (vacation, meetings, internal work)
To maintain a 65% gross profit company-wide, you can’t just break even on billable hours. You have to cover the unbilled time too.
How to Set a Project-Level Gross Profit Target
Let’s walk through the math.
- Target Gross Profit: 65%
- Utilization Rate: 80%
- Labor Cost: $100,000
To achieve 65% gross profit company-wide, you need:
Required Revenue = $100,000 ÷ 0.35 = $285,714
So to cover that one employee’s labor and still hit 65% GP, your project must bring in $285,714 in revenue.
Now let’s isolate just the billable portion of labor:
- COGS (billable labor) = $100,000 × 80% = $80,000
- Gross Profit % = 1 – ($80,000 ÷ $285,714) = 72%
- dLER = $285,714/$80,000 = 3.6
So your target project-level gross profit target is 72%, if utilization is 80%.
Key Insight: If your team bills at 72% gross profit per project, you’ll maintain 65% company-wide—allowing you to bonus anything above that.
Step 4: Bonus Management Using mLER
Production isn’t the only team that drives results. Your management team should have a stake too.
mLER = Gross Profit / Management Labor Cost
Let’s say your management/admin wages total $1,000,000, and you maintain a gross profit of $6.5 million. Your mLER is:
mLER = $6,500,000 ÷ $1,000,000 = 6.5
If the company performs even better—say, a $500,000 increase in gross profit—you could bonus this out to your management team based on their share of total base pay.
Important Note: If production staff earn bonuses, those payouts reduce your gross profit—and that affects mLER. If you decide to calculate mLER after accounting for production bonuses.
In that case, to keep things aligned and fair, we suggest setting a minimum mLER threshold of 6.0. If mLER is 6.0 or higher, management becomes eligible for their bonus. This is generous, but a great incentive for such a high performing business.
This ensures:
- Bonuses are aligned with overall business performance
- You preserve a healthy net income margin
- Both revenue-generating and support teams feel valued
- The bonus system remains fair, transparent, and motivating
This is just one example of how you can structure performance-based bonuses. The numbers, thresholds, and metrics like dLER and mLER can—and should—be adapted to fit your business model, margins, and culture. Think of this as a starting point, not a rigid formula. I don’t want to make it too complicated for this example, but you could also introduce tiered bonuses so that it’s not all or nothing.
Step 5: Declare Bonuses Based on Value, Not Emotion
The biggest mistake we see? Declaring bonuses based on gut feel, not data.
Use dLER and mLER to:
- Motivate team performance
- Keep your salary cap intact
- Maintain profit while still rewarding excellence
Set these rules in advance, communicate them clearly, and track performance against your targets by job/project, and monthly or quarterly.
Final Thoughts: Make Team Bonuses Strategic, Not Surprising
Your team wants to win—but more importantly, they want to know the rules of the game. A well-designed bonus structure turns every project into a performance scoreboard. It gives your team clear targets, a shared incentive, and a reason to care about margins.
That said, this model only works if you have accurate tracking, job-level costing, and clean data. Bonuses should only be paid out after confirming that net profit targets are met and cash has been collected—not just based on unbilled or theoretical results.
For production staff, consider quarterly bonus payouts based on the combined performance of all completed projects. This avoids rewarding isolated wins and ensures consistency across the board.
At Argento CPA, we work with founders to build compensation strategies that reward productivity, align with profitability, and scale with the business. If you’re ready to build a team bonuses structure that actually works, we’re here to help.
Want Help Structuring Your Bonus Model?
Let’s build a dLER- and mLER-based team bonuses plan. Reach out to Argento CPA for a customized calculator that fits your margins, team size, and financial goals.
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About the Author
Michael Argento, CPA
Founder + Fractional CFO at Argento CPA
Michael helps ambitious Canadian business owners align compensation with performance. From Creative Agencies, SaaS startups to scaling construction trades businesses, he builds financial systems that reward results—without sacrificing sustainability.