Subscribe to the Tough Things First blog

When Bonuses Aren’t

When Bonuses Aren’t
In Leadership, Management

A $100,000 Christmas bonus check will certainly get your receptionist’s attention.

An oil and gas company in Texas did just that. Not only for their receptionist, but for every employee from the front office to the front desk. This was not some misguided or guilt-ridden spasm of generosity, but a planned incentive. The short story is that the CEO told the entire company there would be one hundred grand for everyone if everyone helped the company reach its annual goals. The corporate culture was already one of “we’re all in this together,” so setting a holiday bonus to mutually obtainable goals was a glittering extension of what already existed.

And perhaps unnecessary.

For thirty-seven years I ran Micrel, a Silicon Valley semiconductor company. Micrel experimented with most forms of compensation and incentive, and certain realities and myths came to light. Incentives and bonuses were central because Micrel was born into a highly competitive industry in an insanely competitive region. Getting incentives right was important to survival, growth and stability.

As a general rule, bonuses don’t work well as an incentive (despite our opening $100,000 story). Micrel’s various bonus programs were diverse. Some were tied to MBOs, some to revenue; others were linked to various time-related metrics. Taken as a whole, bonuses rarely moved the needle. The question is, Why?

There are three basic reasons to toss bonuses onto a table, and each has up- and down-sides:

COMPETE: People make things happen, and you want the best people you can get. To attract people in a competitive space, various incentives have been tried (during the dot-com frenzy, one startup offered free leases on new BMWs to key developers). But the fact is, most people work where they do for the challenge, the culture or the excitement. Google is a great place to work because they change the world on a daily basis, and the compensation is secondary.

RETAIN: You want to keep talented people. Like many other companies, we tried incentives like restricted stock units (RSUs, AKA “golden handcuffs”). Yet exit interviews never showed that compensation, bonuses or stock options were why people left (and relatively few Micrel employees did leave). The primary reason was having a boss they did not get along with. People stay because they enjoy the culture, the people and exercising their talents. No bonus check will keep a person on a team where they are uncomfortable, fearful or alienated.

ENCOURAGE: Bonuses can encourage people to achieve goals. But the goals need to be clear and obtainable – nobody can work to vagueness. Such bonuses can work on an individual basis, but great synergy is created when it applies to a team. The genius behind the $100,000 example was that the goals were corporate-wide, which encouraged employees to help one another achieve them. This divorced egos and banished silos.

None of this speaks to regular “entitlement” bonuses. If cash is dispensed without a reason, it becomes expected. A Christmas bonus no longer becomes a sign of encouragement but one of corporate obligation. This is not to say holiday bonuses have no purpose. Many companies shut down for the week of Christmas going into New Years, and this puts significant hardships on employees who lack sufficient accrued vacation time. A Christmas bonus – even a modest one – defrays this burden, is deeply appreciated and improves employee retention.

Bonuses by and large are not effective tools as incentives. The only time they are truly useful is in encouraging people to attain goals. But on an individual basis, goals may seem unrealistic. On a team level anything is possible and bonuses encourage collaboration. If you have a healthy corporate culture, you can attract and retain people with few financial incentives. But to inspire employees to row hard, fast and with perfect synchronization, bonuses can make a difference.

Comment (1)

  1. Ray,

    Agree, Money cannot be the primary motivation, however its importance cannot be under stated.

    These are my observations as an entrepreneur in terms of attracting & retaining employees:
    1. Startups have to show a promise of technology & place of value creation
    2. Employees need to be compensated for higher risk
    3. Employees have to be sold on the promise of wealth creation. This is expecially true as there is a higher risk, at least perceived.
    4. Customer & employee attraction have many parallels: better technology ( value creation), better product (work culture), cheaper price (higher financial rewards).
    5. I think RSU / profit sharing tied to performance might be more effective as opposed to surprise bonus / largess.

    Thanks,
    Rajesh

Leave a reply

Your email address will not be published. Required fields are marked *

*

2 + 7 =


You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>