Posted: July 18th, 2015

An oil and gas company generally rewards its employees with an annual bonus. T

An oil and gas company generally rewards its employees with an annual bonus.  T

The bonus target is set as a percentage of the employee salary.  The employee’s actual bonus award payout may increase or decrease from the bonus target, depending on the company’s annual performance. (If the company has a good year, the bonuses may be higher than target.) Additionally, good individual performance on the employee’s part can increase the employee’s bonus.  If an employee receives a year-end performance rating of a 1, their bonus is increased by 20%, and if they receive a rating of 2, their bonus is increased by 10%.  All ratings of 3, 4, or 5 will be paid out at the target plus (allowing for increases/decreases due to company performance).

The bonus is accrued each year using the target bonus percentage plus 1%, to accrue for performance fluctuations.

Example:
If an employee’s current salary is $90,000 annually and their target payout is 10% of their annual salary, the employee’s annual bonus would be $9,000.  If the company decided to pay out at 150% of target, then employee’s bonus would then be $13,500.  If this employee received a performance rating of 1, this bonus would be an additional 20% higher; therefore the employee bonus would be a total of $16,200.  Since the company accrues at target + 1%, the accrual for this employee at the end of 2013 would have been $9,900 (11% accrued).

Use the data below to answer the questions.

Employee    Salary Grade    Annual Salary    Performance Rating
Sarah    10    58,000    3
Ben    12    80,000    1
Stephen    11    64,000    1
Mary    12    78,000    2
Jennifer    10    60,000    3

Salary Grade    Bonus Target
10    8%
11    8%
12    10%

a.    Determine the monthly accrual amount for each of the 5 employees based on the target plus 1% accrual assumption.
b.    Determine the total payout for each employee based on the actual payout percentage; be sure to include any adjustments for performance.
c.    Assume these employees all pay 39% tax on their bonus.  What is their total after tax take home bonus, per employee?
d.    Write a short (professional) email to the CFO of the company explaining the total bonus payout using the 125% of target, including all performance adjustments.  Explain the differences between the total accrual and the total payout number.