Let's Keep It Simple...Oops - Slicing Pie

Let’s Keep It Simple…Oops

Bonus programs are intended to motivate employees, but many of them do just the opposite. Usually coupled with a weak annual review process, the subjectivity puts everyone in an awkward position. Managers avoid arguments by overpaying bonuses, or justify lower bonuses by citing reasons outside their control (“it’s not in the budget!”)

I once took a job where the hiring manager said, “let’s keep it simple, I’ll pay you 10% of net income above 10% growth next year in my division as a bonus.” He thought he was setting a high bar, but I saw things differently and eagerly agreed. At the end of the first year, I had grown net income by well over 30% and I was due a very large bonus. However, the overall company results were not good. Nobody else was getting a bonus that year. Additionally, part of how I grew net income was to reduce variable expenses, which the management team had not anticipated. So, my manager could not pay my bonus. What could I do? Cry? Sue? I wound up leaving several months later…

Simplicity, as nice as it sounds, should not be the goal of your bonus program. The goal should be to grow the business and reward those individuals who participated in its growth. A good bonus program will align the team, provide motivation, and increase transparency and accountability. A bonus program doesn’t have to be too complex, but there are some important nuances to getting it right.

For instance, corporate goals are very important and are shared throughout the organization. Sometimes managers set “stretch goals” which are so high they are a joke among the rank-and-file. Other times goals are met or exceeded because of some unforeseen event that causes a windfall for employees, but does little to increase the viability of the business. For instance, landing a great big client in the fourth quarter can bring in enough revenue to meet the goal, but the company is vulnerable because it has one large client.

Corporate Goals

A corporate goal should have two parts: 1) a financial goal or productivity goal, and 2) a momentum component. The financial goal is what the company needs to succeed, and the momentum component ensures the goal was met based on the right behaviors of the team. For instance:

  • Financial Goal: Annual Revenues of $1,000,000
  • Momentum: 20 new clients in December

in this example, getting to the financial goal is important, but only if it’s building long-term stability for the company. Getting 20 new clients in December implies that the company has been working sales funnel for some time. Without this momentum goal, they could land one huge client in August and rest on their laurels for the rest of the year. This would meet the goal, but leave the company in a precarious position.

Functional Goals

A corporate goal by itself, can do little to impact behavior, and needs be broken down into smaller components. The operations department may not be able to impact revenues, but it can impact the implementation of selling technology. The marketing department may be able to impact revenue, but may not be able to directly control the cost of infrastructure. Functional goals, therefore, need to be set based on the individual’s or team’s ability to have an impact. Additionally, achieving goals may have multiple steps, and each step may have multiple components provided by people or teams from across the organization.

As you can see, keeping it simple is not always possible. The program needs to capture a number of important moving parts. The main moving parts are:

  • Corporate goals
  • Functional goals
  • Milestones for monitoring progress
  • Bonus compensation program
  • Structured communication

On top of that, you need to have a way of getting buy-in from team members and documenting the whole process. The good news is that this is all doable and can be applied to any team. It ties nicely into Slicing Pie and that compensation can be paid in cash, if you have cash, if not you can allocate slices.

Don’t be afraid of adding a little complexity to your bonus compensation program. People are pretty smart, and they will buy-in to a structured program that makes logical sense and stimulates the right kind of behaviors from the team.

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