Design an EBITDA and cash bonus plan

Who this is for

Founder led lower-middle market companies with 5 to 50 million in annual revenue that want a simple bonus plan tied to real outcomes.

The quick answer

Set a simple gate so the plan pays only when EBITDA and cash meet targets. Fund a pool as a percent of EBITDA above the gate. Split awards across company, team, and individual outcomes. Pay most after year end and hold a small portion until cash from year end invoices is collected.

The method in seven steps

Choose the gate
Pick an EBITDA target and a minimum cash threshold. The plan pays only when both are met.
Define the pool formula
Set a percent of EBITDA above the gate that funds the pool. For example ten percent of EBITDA dollars above the gate.
Set award weights
Split awards into company, team, and individual results. Common weights are fifty, thirty, and twenty.
Write measures clearly
Company EBITDA, cash conversion, and safety or quality where relevant. Team outcomes that match the department. Individual goals that are few and specific.
Publish payout timing
Plan to pay most within sixty days of year end. Hold a small portion until cash from year end invoices is collected.
Handle special cases
Prorate for partial year service. Define rules for leaves, promotions, and exits.
Communicate with examples
Share two worked examples. One at gate and one at upside. Use plain numbers so people can follow the math.

Example

A company used an EBITDA and cash gate and funded the pool from results above the gate. People understood when the plan paid and why. The team focused on margin and collections late in the year which protected cash.

Pitfalls and fixes

Paying when cash is tight. Use the cash gate.
Many goals per person. Keep individual goals to three or fewer.
Confusing math. Share worked examples.

Checklist

Gate set for EBITDA and cash
Pool formula agreed
Award weights by level
Measures and timing written
Rules for special cases
Communication plan with examples