The Bonus Experiment
So many amazing things came out of our quarterly review session in July—and you bet I’m going to tell you about all of them! (If you don’t know what I’m talking about, you can find my other posts about the session here and here.)
Another thing we’re implementing because of our time together is a new bonus structure. It’s been a while since we’ve had a formal structure because I’ve struggled in the past with offering financial incentives. I think if you do them right, people are motivated, they feel valued, and they feel ownership over their results. But if you get them wrong—which is too easy to do—people can feel demotivated, devalued, and like they have no ownership or control over their success.
Years ago, after many failed attempts, I got rid of what you may call “standard” bonus structures that many organizations use. Instead, when the business did well, I set aside a portion of the Difference Dollars (what we call profit) and told the team the overall amount we could afford to give as a bonus. Then, I left it to them to decide how they wanted to split it up based on the work each person did during that quarter. Usually, they decided to split it equally. While that kind of worked, it wasn’t exactly fair. It put people in an awkward position. If they felt like they deserved more, it meant their teammates got less. I knew it wasn’t the solution, but I wasn’t sure how to create a structure that really rewarded people and was fair.
In our quarterly review, no one asked for a new bonus structure. But I decided that it’s the right time to experiment again. You might be thinking that it’s definitely not the right time to do that—or to give bonuses at all—because of the position our company is in due to the pandemic. But the way I see it, bonuses are a tangible way for leaders to say, “Thank you for working so hard,” and our team has never worked harder than right now. They deserve it. We all do. That being said, implementing this won’t cause anyone to jump up to the next tax bracket (we wish!). The bonuses we can afford to give have never been very large, and they certainly aren’t right now, either. But that doesn’t mean we can’t or shouldn’t start somewhere. Plus, there are other benefits: Bonuses help us get more invested in the overall financial goals as a team. Hitting these goals doesn’t just mean a couple bigger paychecks; it means company-wide raises and reaching our huge goal of being debt-free. The more we can earn buy-in on financial goals, the better chance we have at reaching them.
So far, our bonus experiment is working. It’s working better than any structure we’ve had in place in the past. We still have a lot to learn, but I thought I’d share how we approached this new system in case you too have struggled with how to best create financial incentives that are rewarding and meaningful:
Before I could crunch any numbers, I knew that I needed to define a “philosophy” for bonuses. I asked myself questions such as, “What is the purpose of the bonus structure?” and, “How should this structure make the team feel?” and, “What does success look like from the team’s perspective and from the company’s perspective?” Here’s what I came up with:
Bonus Structure Philosophy
We will know the bonus structure is right for us when:
The structure is rewarding and meaningful to the team
The structure fuels the growth/cash position of the company
People are motivated on an individual and team level
The philosophy helped me define the why of bonuses. Next came the what. To bring the philosophy to life, what did the structure need to include? What are its parameters and non-negotiables? Here’s where we landed:
Criteria of the ideal bonus structure:
Unambiguous, objective goals based on what the team has been able to achieve in the past instead of feelings or opinions about our capabilities
Simple, easy-to-calculate metrics so that everyone on the team can understand how close they are to achieving a reward in real time
Bonuses paid to the team in a timely manner while also considering the company’s cash position
Bonuses paid by Difference Dollars (profit) and not cash reserves
Fair and equitable. Every person must have the chance to earn a bonus that is meaningful to them while also understanding that some may get higher bonuses than others due to differences in roles and responsibilities
Presented with the understanding that we have permission to experiment and that we may make changes to the structure based on what we learn. Those changes may be in favor of the team, the company, or both.
With the criteria decided, I moved on to what the structure would actually look like. How was this going to work?
With past financial goals and bonus structures, my strategy had always been to give the team a BHAG (from Jim Collins’ Good to Great): a big, hairy, audacious goal. I figured that if we aimed as high as we possibly could and we missed, we would still end up in a better financial position than we would have if we never tried. The thing is that I never actually expected us to hit the BHAG. I always set BHAGs with a, “Wow, wouldn’t this be great?” kind of attitude. But in my research about bonus structures (I linked some helpful articles I read at the bottom of this post) and in talking to our team, I realized that for a goal to be motivating, it has to be realistic. So what I was really doing by setting BHAGs was making my team feel unmotivated from day one. They saw the BHAG as the expectation, so when we didn’t hit it, it felt like we failed.
So, in our new bonus structure, we decided not to have only one big goal, but to have multiple goals and levels. This way the team could be rewarded for achieving realistic goals and also be inspired to push beyond that. Here’s what it looks like:
Bonus Structure Levels
Level 1: Should be easy to achieve (goal is that everyone receives a bonus). This goal is the minimum number needed to keep the business afloat. Hitting it should be a piece of cake so that it gets people motivated right from the beginning.
Level 2: Should be slightly harder to achieve than Level 1 but still very doable.
Level 3: The “real” goal. Hitting this goal means we’re on track to continue with future success. Should be slightly harder to achieve than Level 2.
Level 4: Should be a lot harder to achieve than Level 3 and put us on track to achieving our goals sooner than expected.
Level 5: The BHAG. Should be the most difficult to achieve. Hitting it would be a monumental success and allow us to accomplish goals (like being debt-free, for example) a lot sooner!
It’s been fun trying something new as a team. By the end of this quarter, we’ll know what we love about the structure and what we don’t love so we can make improvements and roll it out to the whole company. The end goal is to have a company-wide structure that gets our students involved and motivated by our big-picture financial goals so that we can grow more and do more together.
If you are looking for a way to reward your team and inspire financial ownership, maybe these ideas will help you. And if you are on the other side and you feel demotivated by the financial incentives your leader has given you, speak up. Share your feedback and suggest other ways to make it more meaningful. There is definitely a way to make it a win for all!
Happy bonusing!
Kristen
PS: Articles I found helpful when thinking about our new structure . . .
How To Structure Bonuses And Profit Sharing Plans - It Isn't That Hard
8 Secrets To A Perfect Bonus Program
Which Bonus Structure Is Best for Your Company?
How to Structure an Employee Bonus Plan
How To Build Incentive Plans That Actually Work
PPS: Have you heard about my new LIVE show on Wednesdays at 11 a.m. ET on Zoom? Think of it as real talk. I share all of the challenges I’m navigating as a leader and I also take questions from you! You can register here: https://bit.ly/3kWe2kT. It’s the same link each week. Hope to see you there!
