Help understanding my bonus offer

Question

I've recently gotten a job with a company that offers a yearly bonus, however I'm not understanding in the contract how the bonus is calculated. It states :

Bonus Opportunity: $1,875 (pro-rated based on start date)

The bonus has four components:

• Profitability of the firm*
• Profitability of the Team*
• Personal Utilization
• Individuals objectives/goals (SMART – Specific, Measurable, Agreed upon, Realistic, Timely)

Each year the profitability goal of the firm and the Team will be set, as well as the personal
utilization goal, to align with the company’s strategy.

This is my first time working for a place that offers a year end bonus so I honestly don't understand how it is my year end bonus will be calculated.

Current Year Targets
Profitability of the firm 27% of net revenue 33%
Profitability of the BI Team 18% of net revenue** 33%
Personal Utilization 75% average 33%
Objectives/Goals
1. Knowledge Sharing 30% Factor
2. Administrative Tasks

They provide an example if it helps with clarification

The bonus opportunity of the profitability targets increase by 5% for each percentage point that the target is exceeded by.

Example: Profitability of the Team comes in at 7% - the bonus opportunity of that target goes from $5,000 to $5,500 .

The bonus opportunity of the utilization target increases by 2.5% for each percentage point that the target is exceeded by.

Example: Utilization is 85% - the bonus opportunity goes from $5,000 to $6,250.
There is no cap to the bonus upside.

I apologize if this is off topic but I'm fairly certain based on the guidelines that it is in fact on topic. To my understanding (I could be completely off) the maximum bonus I can receive for this year is $1,875 based off the Bonus Opportunity.

Answer 1

To my understanding (I could be completely off) the maximum bonus I can receive for this year is $1,875 based off the Bonus Opportunity.

No It is incorrect. It is indicative, it can be way more [unlimited] or less.

Profitability of the firm 27% of net revenue 33%
Profitability of the BI Team 18% of net revenue** 33%
Personal Utilization 75% average 33%

If the above 3 occur, you will get 1,875. In other words for each of the 3 targets you will get 1875/3 = 625.

Note if the company profit is say 29%. For each 1 percentage you will get 5% more. i.e. 10% more of 625, so 62.5. you will get (625+62.5) + (625) + (625).

Now say your personal utilization is also 85%, you will get 10% more. (625+62.5) + (625) + (625+62.5).

There is no cap to the bonus upside.

As there is in theory no limitation a company can grow; i.e. say company profitability can go to 270%. 200*5 = 1000% more of 625. Plus whatever is other 2 components.

However the Profitability of BI Team in theory can't be more than 100% of net revenue. Personal Utilization can be more than 100%.

Note:
If the Company profitability is say 25%. 2% less; you will get 10% less of 625. Likewise if you personal Utilization is say 65%, you will get 10% less of 625.

Bonus Opportunity: $1,875 (pro-rated based on start date)

So based on all the parameters if your bonus for the year is 1,875 [or say company did great and you did great] and it was 2,500;
Then for the partial year, it will be pro-rated. Bonus 1,875 * No of Months / 12

Answer 2

I have a similar bonus structure at my current employer, so I'll try and provide my take on this.

You'll get a certain bonus amount based on how profitable the entire firm is for the year. That's pretty normal - If business is going well, they can afford to give everyone larger bonuses. Consequently, a bad quarter for the business will translate to a bad quarter (in part) for your bonuses.

You'll also see part of your bonus fluctuate based on the performance of your specific team / department. This means that your bonus isn't being inflated by those that are overperforming in other departments, keeping the bonuses somewhat 'fair' based on each business area's individual performance.

Personal Utilization probably needs to be defined better, but it essentially boils down to how productive you're keeping yourself when completing your work, or if you're a consultant (for example) what percentage of your hours you're 'billable' in comparison to hours worked. It's a measure of productivity, and likely one that directly translates into revenue for the company.

The last item, objectives/goals, with the examples of knowledge sharing and administrative tasks, I believe, are usually going to be 'extra' things that are added on. How well you share knowledge and generally 'innovate'. You'll have to find out on your own what this means in your company, but in mine, area 4 relates to putting out public content for the company that's relevant to our field, so that we can keep ourselves visible on social media (Like YouTube). In my example there, though that's not even close to something that I do as part of my job, everybody in our organization has a 'goal' to produce X number of pieces of content per quarter, and a small amount of our bonus goes to what percentage we've met that at.

That would actually be the only difference between the structure my current employer uses now, and the one you've noted above.

Anything 'extra' that our employees do that's considered very positive (like improving processes, automating certain internal tasks, etc) for the company is just considered as part of that area 4 / administrative tasks and bumps up that category.