In this May 2025 episode of MSPCFO Office Hours, hosts Lori Berry and Larry Cobrin welcomed Eric Hoffmasterto unpack how to build effective bonus plans for engineers—programs that inspire better performance while reinforcing profitability and service quality for MSPs.

The 3× Revenue-to-Pay Benchmark

A central theme was the benchmark that engineers should generate at least 3× their pay, especially under managed services agreements. This metric keeps incentives aligned with efficiency and margin, making it easier to connect individual impact to company outcomes.

Four Stages of Bonus Plan Evolution

Eric and Larry outlined a maturity model for bonus structures:

1. Stage 1 – Owner-Centric: Bonuses awarded at owner’s discretion; limited data.

2. Stage 2 – Process-Focused: Rewards for following workflows and clean data entry.

3. Stage 3 – Data-Driven Performance: Individual bonuses tied to the 3× revenue goal.

4. Stage 4 – Team Optimization: Blended plans with individual + group incentives (e.g., “double up/down”-style frameworks).

Incentives Shape Behavior

Eric emphasized a simple truth: incentives drive actions. Engineers will adapt behavior to maximize bonuses—so plan design must prevent unintended consequences like skewed utilization or corner-cutting under flat-fee pricing.

Core Design Principles

Two guiding tenets emerged:

• Positive alignment: Behaviors that benefit both client and company should be rewarded.

• Negative consequences: Actions that harm service quality or profitability should reduce bonus eligibility.

Eric’s take: moments when someone doesn’t earn a bonus can create the clarity and urgency needed to fix underlying process issues—turning short-term pain into long-term improvement.

Watch Out for Pitfalls

Key risks when implementing performance-based plans include:

• Poor data quality — undermines trust and credibility.

• Cultural resistance — pushback when bonuses touch pricing or performance.

• Gaming the system — cherry-picking tasks, rounding time, or sacrificing service quality if metrics aren’t aligned.
  Tying bonuses to revenue and margin, with quality guardrails, helps mitigate this.

Data Foundations: The Vital Five

To support bonuses effectively, ensure:

1. Agreement-covered time is marked billable (not “no charge”).

2. Flat-fee revenue is separated into service vs. product components.

3. Invoices flow through the PSA, not external accounting tools.

4. Tiered billing rates reflect engineer seniority.

5. Actual time is captured (no manual rounding); let the system apply any rounding rules.

Tiered Rates Encourage Delegation

Tiered rates naturally nudge senior engineers to delegate and coach—protecting their own bonus potential while elevating the team’s overall capacity and client outcomes.

Actionable Tips for Rollout

• Start from today’s baseline: If you’re at 2×, begin there and ramp toward 3×.

• Promote transparency: Share dashboards and benchmarks in team meetings.

• Link incentives to long-term results: Client satisfaction and profitability must stay in view.

• Use experienced guidance: Coaching and proven frameworks accelerate adoption.

• Enforce quality safeguards: Define standards so incentives don’t erode service.

The Bigger Picture

When structured thoughtfully, engineer bonus plans create alignment: clients get better service, MSPs gain profitability, and engineers share in the value they deliver. As Larry Cobrin summed up: profitability trends “up and to the right” when everyone rows in the same direction.