salaryOne of the things I see very frequently in companies is that employees are offered a fixed salary (which is okay) and a variable bonus on top of that. Especially in sales this happens a lot based on a sales-out target - but software developers are also frequently offered bonusses f.ex. based on projects finished within time and budget.
For a long time now I have been thinking about the impact these bonusses have on the culture of a company. I believe that bonusses tend to make people more self-centered, which can seriously harm business (e.g. they will usually ackomplish the task, but with less regard for the big picture). I also wonder if you really need them, because you usually already have things like appraisal talks in place.
However, I also found it very difficult to hire f.ex. sales people without a target (I’ve seen a lot of good sales guys that demand a target), and found a ‘normal’ base salary of sales people without a target unproportionally high with respect to f.ex. software developers. This of course also has an impact on team culture, because people might (IMO justly) experience the difference in salary as ‘unfair’.
So, that’s a paradox. I’m always happy to learn new things, so I’ve been wondering if people here have (both other and similar) practical experience on how bonusses influence culture in a small startup and what good / bad practices are? Or perhaps there are other ways to solve these issues?
Bonuses are very complex. I once heard of a story of two sales teams incentivised to compete against one another in a global telco to drive profits. The scheme was very simple, each quarter a fixed bonus would go to the team that achieved the greatest sales numbers. This competition resulted in a catastrophic, and unforeseen event.
One sales team (t1) were close to closing a very significant 6 figure deal. That would have taken then above the other team (t2) and won them the bonus. However, with only days left to the end of the quarter, t1 were going to be unable to make up the shortfall if t2 successfully landed the client. So to ensure they won the bonus one resourceful (if somewhat misguided) member of t1 proceeded to contact the client and scupper the deal. This resulted in more than a 6 figure loss for the company, it lost them recurring revenue, and a valuable client relationship that would have grown.
As others have said sales people are motivated by the hunt, you have to make sure you motivate them to tackle the right pray. For others higher level needs are more important, being valued, creativity, mastery, shared purpose, and autonomy.
Bonuses can have plenty of side effects, some good, some bad.
Bad side effects I’ve observed first or second hand over the years:
Team bonus gets distributed homogeneously in an engineering team, yielding resentment because this or that person worked more or less.
Team bonus gets entirely distributed to their manager’s personal buddies, yielding resentment because of favoritism. (The manager got sacked.)
Sales commissions tied to the number of leads in their pipe rather than to the amount of sales closed, yielding sales staff that don’t bother qualifying their leads early on.
Sales commissions tied to the number of deals closed rather than to the amount of sales closed, yielding staff that focused on the easier but less lucrative types of deals.
Sales commissions capped and/or without multipliers, or tied to too high targets, yielding sales staff with an “I’ve made my target, so I’ll stall the rest for next month” attitude.
The key takeaways if any are:
If you want great team work in an engineering team, assign an homogenous bonus to the team when it performs well on top of individual bonuses to high performers within it.
If you want sales to work for you, make sure their bonuses are tied to something you actually want to happen, with as few side effects as possible.
With respect to sales bonus, btw, one of the better ways I’ve seen it done was more or less this:
To illustrate with simple figures, suppose you’re a sales paid $5k/month + 10% commission. You’d earn $5k for bringing in the first $50k (normal commissions pay for your salary). And $10k for every $50k beyond that (double commission). So if you brought in $250k, you’d get $45k (or more, if your boss is so happy he tosses in an extra bonus).
You can throw in specific targets on top, of course, such as a minimum number of deals of a certain type. But the core of the dynamic is to get the sales to grok that they’re valuable and valued if and only if they bring in more than what’s needed to pay for their fixed salaries.
The rule of the thumb is that you get the type of behavior you incentivize. If you incentivize leads, you get leads but that may not amount to sales. If you incentivize things done on time, you get things done on time but they may not have the quality you expect. If you incentivize individual achievement then cooperative team behavior may suffer.
Pick a leading or trailing measure that is a good indicator of the output you want and make sure that it is not incentivizing the wrong thing. Keep in mind that over time, all bonus systems would get ‘gamed’ so do a review every few years to see if the bonus scheme is yielding the right output and if not make corrections. This is essentially what happens when you pick the wrong measure http://dilbert.com/strip/1995-11-13
Many companies have had success tying the bonuses to an overall performance appraisal that is carried out quarterly or semi annually or annually. The advantage is you get to assess a set of measures and behaviors rather than one. And you can use it to guide and encourage the employees to create the type of behavior you want in the company culture and eliminate the behaviors you don’t.
The best way is to know what to include in an appraisal is by assessing the behaviors that you want in your culture. Behaviors and achievements that match your values and help guide the company to achieve the vision, mission, goals and specific targets set out for the period. Then assess the rewards for those behaviors. Research the industry to see how the competitors are rewarding because you would want to keep the overall package available to the employee competitive. You can make the total bonus amount you distribute to employees a floating value by tying it as a percent of what the company made in the duration. How the individual bonus is distributed can be tied to the score on the appraisal.
For picking measures:
Determine the measuring duration. If the goal is an intermediate or long term goal like an annual sales target, it helps to break down the goal into shorter periods so that you can make adjustments in time before it is too late. For example, if you divide the annual sales into monthly or weekly targets, the sales reps would know when they have missed their goal and can make up in the coming months before the year is up. This is applicable to other measures as well.
Determine the competency level and how complicated the task is. If it is a simple task you can simply take a trailing measure. If it complicated or important, you use leading measures which measure activities that lead to the successful completion of the task. If it is sales, measuring the lead response time, rate of contact etc a good leading indicators. Round it by adding trailing measure like measuring the closing rate, value per customers and sales per duration. If you want the employee to keep working on sales after the periodic target has been achieved then add a second bonus for sales after the target with a different higher reward rate.
Determine activity important. While all activities in the company contribute to the overall company performance, all activities do not have the same measuring rate. For example, a sales rep can close a deal in a few weeks while a developer can take months or years to finish a project. If both tasks are important reward them equally but issue them when the goal is achieved.
Activities that contribute directly to the bottom line are usually are given a higher priority. These activities can have more frequent measuring durations and rewards like a commission bonus given monthly as well as a company bonus linked to the appraisal. Work that is secondary can be rewarded with the overall company bonus linked to the appraisal.
Edit:
Measures are more applicable to tasks that have procedural step wise activities and normally you don’t apply activity based measures to creative tasks like designing. Creative tasks are usually rewarded on accomplishment with a trailing measure such as completion time or under budget. In some cases, the it is related to a external factors such as impact in the company, market performance or client satisfaction.
All appraisals, interviews and assessments use measures to gauge the presence of an expected target trait in candidates or in candidates performance. For example a job interviewer uses question that measure the presence and level of a desired skill or trait.
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