Bonuses – Management Inequalities

If you own a business, I believe that you have a right to make more money than the rest of your employees. You are taking on a risk, and greater risk should result in greater reward, at least that’s how capitalism is supposed to work.

But what about management? Often I see management (meaning directors, VPs, C-level) having different bonus plans than employees. They have different targets, which makes sense, but also different measures. As a result, management often gets bonuses when employees do not.

I think this is a huge mistake. It contributes to a lack of loyalty from employees, they don’t trust management, don’t see them as leaders, and don’t feel they have a reason to support the company.

In times past, in the military, in companies in the late 1800s, workers had much less power and management took advantage of that. Workers don’t have much more power today, but they have much greater mobility, especially in the technical world. That means that by not creating a more equitable distribution of incentive pay, or bonuses, you are destroying the goodwill you can build with employees.

If you are running a company that deals more with very unskilled labor, say a retail store, then perhaps it doesn’t matter as much. If you have high employee turnover, then perhaps you are not losing much, though I would argue that you could reduce training costs with better retention, and that’s what bonuses give.

I’m getting off track here, but I want to provide a basis for building a better bonus plan.

I think management should have different targets they need to achieve, but these targets much be tightly coupled to those targets for employees. In fact, one of the management bonus targets ought to be that employees get their bonuses. If this measure isn’t achieved, then how is management succeeding? They must be driving employees, who actually do the work, to do a better job, or at least get the best effort out of them.

Management bonuses should be larger, and you can’t do much about the anger there. They take on greater responsibility, arguably greater risk in their career, and should be rewarded, but in determining that reward, it ought to also depend on their subordinates achieving their goals as well.

The Twitter Ripples

I saw this post on The Business of Software Blog about a use of Twitter to spread the word for a marketing guy. As an aside, I attended the 2008 Business of Software conference and it was outstanding. I’d recommend it to anyone in the software business.

It’s an interview with Dan Nunan, with whom I used to work, and it talks about how he handled a recent trade show. Pressed for time, they created a reconstruction of the Huson River plane crash that had occurred recently. What’s interesting, is how he used Twitter to spread the word and have a fairly wide reach.

It’s unclear if it was successful, and I think for many marketing efforts it’s a cumulative effect over time that determines if you’re successful, not the immediate response. Still I think it was a creative use of the medium, and a recognition of how the ripples can spread out from Twitter to mainstream media.

Bonuses – Once a Year

I worked at a company that had a yearly bonus. Actually I’ve worked at a few companies, but this one in particular set a plan in motion in January of one year. This plan was structured as follows:

• Meet a target of xx revenue for the year
• Achieve a yearly profit margin of yy%
• Have no unprofitable quarters

I don’t remember the exact targets for xx and yy, but they aren’t important. Most employees I knew thought these were reasonable goals, would require some work, but not an extraordinary effort, and were fair. People were excited, and despite a slow economy at the time (this was around 2002), they worked hard.

Until April.

When we released our Q1 results (we were a public company), we hadn’t had a profitable quarter. Management gave us the usual story about being upbeat, we can still pull together and work hard, and we’ll have a good year.

Anyone want to guess what happened with moral?

Salesman still pushed hard, after all, they have a separate bonus structure called a “commission”. Most of the rest of the company was a little disillusioned. Not that they looked to quit, or stop working, but there wasn’t an incentive to work harder than necessary. Executives were mystified, they pushed harder, complained, and tried to motivate people.

I found out later that executives had a different bonus structure than the rest of the company, which is something else I need to write about in another post. So they were on track to still make bonuses.

Many employees, however, checked out for the year. “We’ll hope for bonuses next year” was the consensus for most people working there. The #3 item for our bonuses had been blown by a bad quarter, which meant that there was no longer an incentive to work harder.

Granted employees owned stock, so they would still get some benefit from a profitable company, but most don’t own enough stock, and tend to hold onto it, so this doesn’t provide any short term incentive.

And that’s what a bonus is, a short term incentive.

What could be done better? First, a bonus should stand on it’s own in a period. Each part of the plan above should have been assigned a percentage of the overall bonus. If we had 1% of our bonus come from each quarter and the other 6% from the first two incentives, people would still be motivated. They’d have lost one part of their bonus, but not all of it.

I also think that having yearly bonuses, the traditional “Christmas bonus” is a mistake. It’s a long time for employees to focus on the incentive, and with the uncertainty in many companies and the lack of loyalty from both sides, it falls out two ways:

• You have to overpay to make it an incentive.
• You don’t overpay and people just stop caring.

In either case you aren’t necessarily building a good business plan.

My thoughts are that you should motivate people in short bursts, provide incentives to change behavior for short terms, make them fair, and change them often.

My next post will look at some of the issues with management.

FedEx'ing Easter Eggs

My wife has had a hard week. Actually a few weeks where she's worked a lot of hours, lots of phone calls, computer work, all trying to get a big contract going with a customer. It's been stressful and hard on her, making her question this job a few times.

Apparently her boss has been paying attention and wants to let her know that he appreciates her and he's aware of how hard things have been. This morning, while Tia was on a conference call, the FedEx guy came and rang the doorbell. He dropped off a small box, about the size that a cell phone comes in. It was from her boss, so I took it in to her.

She opened it up, and inside was an envelope that contained 4 or 5 small chocolate Easter eggs and a handwritten note telling her that he appreciated her hard work and to hang in there as things would slow down soon.

It made her laugh, and made her morning.

That's a great sign that a manager is paying attention to how his direct reports are doing. Even doubly so since she's a remote employee and only sees him a couple of times a year.

Bonus Targets

The company I worked for met a sales target recently and that triggered a bonus that is paid on a company basis to each employee. That was a nice gesture, and it’s a common goal that helps everyone to push towards earning it, and it’s an equitable distribution.

I then got a note that the group bonus, which is different for different departments, is being altered to a “stretch” but not “impossible” target.

Bonuses are always an interesting motivational tool. You want to motivate people to do their best, and help grow the company. A bonus allows people to share in the success that results from their efforts.

But how do you set targets? How much of profitability should be shared? After all, I’d argue that some profits should be retained for growth and reinvested in the company. Shareholders also deserve some benefits.

Setting targets is hard. In the next few posts, I’ll discuss a few plans I’ve seen, and some good and bad results.