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Michael Norton (doc) is Director of Engineering for Groupon in Chicago, IL. Michael's experience covers a wide range of development topics. Michael declares expertise in no single language or methodology and is immediately suspicious of anyone who declares such expertise. Michael is a DZone MVB and is not an employee of DZone and has posted 41 posts at DZone. You can read more from them at their website. View Full User Profile

What are you rewarding? - We don't pay bonuses

12.21.2010
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It is nearing the end of the year and we at LeanDog are wrapping up our fiscal year. We're looking at the potential tax benefits of spending some of our reserve and we're mulling over other ideas related to the spend of money. We are not, however, discussing our bonus objectives. We aren't discussing them because we don't have them. I, for one, am happy that we don't.

Plenty of companies have bonus objectives. Many of those companies are spending a great deal of time (and money) trying to make sure that those objectives are met (or at least appear to be met). To some, this sounds like a good idea. To me, it sounds like rampant dysfunction.

Bonus programs often fail

I recall working with a customer who was very keen on ensuring maximum utilization of their "resources". Each manager had utilization targets with associated fiscal incentives. Meet the target, get a bonus. Fail and get none. Simple enough.

But this entire system proved to be counter productive and misguided.

The metric becomes more importantManagers were spending a great deal of time monitoring the time-sheets of their employees. Managers would download the data and run it against various formulas to make sure they were within limits. If an employee's ratio was off, the manager needed to figure out how to allocate the time to get the ratios correct, discuss it with the employee, and validate the changes once they were made. In many cases, the time was tracked under the wrong category because the task that was clearly most applicable was not categorized in accord with the allocations. The time was instead allotted to some other task in order to get it into the right category. Much work was done to make sure the allocations were met. The accuracy of the system degraded over time. People's hours were no longer tracked to the actual task, but instead tracked to areas that kept the ratios favorable.
Good work is sometimes punishedAmong the development teams, there was one that delivered to the delight of the customer every time. Their bug count was extremely low. Their customer was actively engaged in setting priority and was aware of the status at any given time. The team worked together, communicating, collaborating, and making things happen. They delivered more frequently with higher quality than any other team in the department. But their ratios were off. For a utilization target of 90%, they were consistently floating at 85%. They were tracking their time honestly. Their manager refused to doctor the time while all other managers were complicit in time doctoring. Directors were given incentives for the percentage across all their teams. So unless the other teams fudged enough to beat the target by a few percent, the director wasn't going to make the bonus mark.

Ultimately, the manager who delivered and was honest failed to meet the bonus objective and was both paid less and reprimanded for failure to meet the company standard. Other teams failed to deliver anything in a year, but showed the proper allocations and were given a bonus.

A raise is a bonus that lasts forever

My advice to managers, directors, and executives who want to pay bonuses? Don't. If you must do so, then break it down based on each employee's income. If you have a top performer, don't give them a bigger bonus, give them a raise. Think of a raise as a bonus that lasts forever.
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(Note: Opinions expressed in this article and its replies are the opinions of their respective authors and not those of DZone, Inc.)

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Andrew McVeigh replied on Tue, 2010/12/21 - 10:08am

i work in investment banking (on the IT side), the prototypical bonus culture.  bonuses cause huge problems.  first, they bias employees towards bonus-maximising behaviour, which often has unintended side effects as the recent credit crunch showed.  further, it reduces labour liquidity in the financial services market as it binds an employee to one firm in the hope of future payment.

my distaste for bonuses is heightened by the fact that it encourages obsequiousness shown by many employees towards their boss(es) in the couple of months before paying out...  i've tended to do freelance work, so thankfully i'm outside of this, but it's still annoying.

however, it's a tough sell to get rid of bonuses.  once one bank starts paying bonuses, others tend to follow leading to a vicious cycle.  recent government legislation in the UK has started turning bonuses into partial raises but it's a very slow process...

 

Jason Kilgrow replied on Tue, 2010/12/21 - 10:39am

There are some conditions where bonuses work and some where they do not. I've been in both and I'm happy to say that my present company does give bonuses...AND raises. So, what does this do to me as a worker? It, more or less, buys my loyalty, hard work, overtime when necessary, desire for the company to succeed (because I get a bigger bonus when the company does well), and makes me love coming to work and giving my best.

Andrew McVeigh replied on Tue, 2010/12/21 - 12:35pm in response to: Jason Kilgrow

I'm happy to say that my present company does give bonuses

It may be that the % of bonus compared to pay is a significant factor here.  In banking, even for IT staff you can find that the bonus is >50% in the front office.  i.e. it's not just a tidy sum anymore, but is a significant chunk of the yearly pay...  and that has real consequences.

Nils Kilden-pedersen replied on Tue, 2010/12/28 - 12:24pm in response to: Andrew McVeigh

but is a significant chunk of the yearly pay... and that has real consequences.

I think that's the point.

Emma Watson replied on Fri, 2012/03/30 - 3:02am

aligning daily, weekly, monthly, and yearly around safety, quality, productivity, human development, and cost. Targets are generated around these objectives and bonus are awarded on hitting (or coming within a certain percentage of hitting) the targets.

If your targets aren't meaningful - the bonus program will fail. If the metrics give you a pulse for the organization on a daily basis and folks are aligned around those targets proactively (monthly and yearly as well) - you're bonus program can be successful for everyone.

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