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Bursts of Color - Down With Bonuses

Bursts of Color - Down With Bonuses
By Geoff Donaker • Issue #40 • View online
Conventional wisdom holds that we should “pay for performance,” so many companies introduce bonus programs even when they’re quite small. One common version grades each employee on quarterly goals and then pays a bonus on 10-20% of compensation. I now believe most non-sales roles are better off without such things.

We could do this... or we could just pay them both $88k and move on
We could do this... or we could just pay them both $88k and move on
A Tale from My Old Days
I introduced a bonus program like this at Yelp in our early days because I thought that’s what we were supposed to do. A year later we concluded that the program was a bust. Negotiating the grades often stretched into weeks of every quarter. Employees were demotivated by any grade less than 100%. And we were only marginally “paying for performance,” as the difference between excellence and mediocrity was only 2-3% of comp. So we cut the program and raised salaries to include the bonus pool… and we didn’t lose anything besides the headaches. I’ve since seen a number of other companies ditch their bonus programs with similar results.
This Does Not Mean Ignoring Performance Management
Of course you still need to set goals and hold people accountable. Over time the top performer should earn more opportunity and thus compensation. One tactic for keeping an eye on this is the quarterly salary review. Also, let’s please agree that a mediocre bonus is *not* an effective way to signal poor performance. If a teammate is really underperforming, the manager needs to handle that directly.
A Bonus Makes Sense if it’s Like Sales Commission
As covered in Sales Commission 101, performance-based compensation is almost always important for sales. But can a bonus program work elsewhere? Sometimes yes, if two things are true:
  1. The bonus calculation comes from quantifiable output that’s not open to interpretation (e.g., business unit revenue)
  2. The bonus is a significant part of that person’s compensation (e.g., >25% of total comp including equity) in order to move the needle and thus make its administration worthwhile
Such programs are most commonly found in sales-related roles like business development or general management… and usually only worth managing when the company has hundreds of people.
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Geoff Donaker

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