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New Production Manager Position, how to structure pay/bonus

just a few things ....

how large is your shop?

Is the lack of inventory control systemic?

Was this employee responsible or involved in lack of inventory last month?

Are there a lot of system "leaks" you are expecting this guy to plug?

Are there changes that need to be made prior to him taking the new position?

How involved are you in day to day production?

Is your company growing very rapidly?

Is his personality amenable to some extra pressure without abusing those under him?

If someone expects to share in the profits (bonuses) they should be willing to share in any loss their lack of ability/foresight/motivation causes also. I don't see how a monthly bonus system would work. Monthly tracking for profit/loss (loss merely being below projected goals the both of you set) would work with a year end or quarterly payout.

If you are a small company you are most likely looking for a clone of yourself. Hard to find....
Bonus should not be profit share as that gets crazy sometimes.

Set a pay package for some number and we will just make things up for example.

First if things go as expected and goals met you expect to pay 75K.

Base pay then in 50K to 60K with the rest being bonus.

Set triggers and goals to those that are very visible and readily measured so nobody suspects any gaming.

If productivity remains at what it is x% of base pay, if it improves add y% for each 5% increase.

If scrap rate is not changed and currently acceptable then add a percentage of base pay and for improvements add.

The simplicity of it is that you can budget for operations and set clear expectations and if things do not improve then cost is minimal but if things improve then profit will follow but pay not directly linked to it.

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just for clarity....(I have been out of the salary thing for 11yrs so I am not current) I did a similar position the OP is looking to fill. Granted this was in California...but it paid 92k for 40hr weeks. Overtime was tracked and given as a year end "bonus" in straight time...no overtime added. Since they paid very well we all were very happy with the income and extra check at years end. It was the hardest working most positive group of people I had worked with. We ALWAYS worked killer hours there...the year end checks were large. 3 weeks vacation after 3yrs...no one ever used it all, that got paid out every year also. The raises were regular. Anyone who didn't fit the "culture" was let go pretty quickly. It was a very stressful environment and fun beyond belief.

so looking at a base pay of 50k-60k for 40 x 52 hours is 2080 hrs per year. Hourly that is approx. $24-$28.84. at a total package of 75k would be $36/hr at 40 hr weeks. From experience I can tell you that will probably be 60-70hr weeks if that shop is hopping. 75k at 70hr weeks is $21/hr....you see where I'm going with this, right?

It would be simpler and more fair to pay a great wage for a great employee with overtime at 1.5 the regular wage...emergency work that is billed at expedite should be double-time...to keep enthusiasm up for those jobs. Then at years end a CASH bonus of whatever the boss feels like. At the end of the year a good boss knows who his "performers" are. At bonus time if you resent giving someone cash, they do not fit the "culture" of your company and should be helped to find new opportunities elsewhere.

For this all to work requires a generous boss, dedicated employees, and strong economic outlook for the field the company works it's mojo in.