For Best Results, Forget the Bonus
alfiekohn.org
alfiekohn.org
Add to this that accurately rating employee performance is very difficult, and you get a huge disconnect between effort and reward. What this means it that employees will seek to game the system by identifying activities that give them a high gain in "review score" for the least effort. This leads to rent seeking, politics, stealing credit, and other such activities. Not everyone plays this game, but those that don't are at a huge disadvantage. I've seen people get the same performance rating where one of them did literally 5x the work of the other, just because of other factors.
Bonuses can only work when they are given soon after the work you do and are (at least somewhat) objectively-measurable. For example, sales commissions work well. I think signing bonuses are also pretty effective at luring a job candidate when they have multiple offers, because they get the money right away. But that's sort of a different scenario.
All employees are part of a pool that evenly distributes a portion of the company's profits.
The employee's incentives become tied to what the company wants most: income.
This might create other incentives like trying to hire fewer people so as to not dilute the pool, but I can't think of a better heuristic than to tie the company's success into each of the worker's success.
What I'm saying is, I think the GP comment is right, that a bonus scheme is unlikely to materially affect performance.
It doesn’t really drive people to work 80 hour weeks, but that isn’t by itself valuable anyway.
If the bonus dollars are evenly distributed as proposed then it won't encourage competitive in-fighting that plagues some incentive systems.
I am not sure about that. I think the in-fighting would then come from people upset that other people that "did not contribute nearly as much as I did got the same bonus".
People will always find a way to no be happy about something.
If a company designs their bonus system to encourage individualism and thus explicit competition for scarce dollars, then it creates a game that people think they have to win at the expense of their peers. In these cases, they have a bonus pool (the "budget"), differentiated pay philosophy (pay for performance), and rarely have an objective criteria for assigning rewards (manager decides and makes a case). In that situation you get a lot more in-fighting because it's the way the game is designed.
If you remove the competitive angle by assigning rewards equally (say, at a certain level of seniority you get a fixed bonus %; or, the company assigns a 20% bonus to everyone to share in the profits), then you are no longer giving people a game to win against their peers.
And both are vital parts of a company. You can't have a bunch of co-located people without someone taking care of sanitation.
Of course, you may choose a 100% "remote work" company to avoid that issue but in this instance each employee is their own janitor anyway.
There is a flipside benefit too: the lesser paid people - other devs? You? Me? - will be happy to see the rockstar dev get such a wage/salary because they know they are worth it and it adds to their own company bonus.
And when people are not such a rockstar after all, they will see scrutiny on all sides.
A star performer should be getting "star performer" salary/wage.
I think it should be proportionate though. If you work for 1 year full-time then you get 1 portion. After all that person is giving approx. 1/45th of their working life to the company. ( Pro-rata reductions for people who work part-time )
It's a pity that the people who choose the remuneration would never go for it. They might not be able to afford their new BMW if they are sharing the bonus pie with the staff who actually help customers.
As an individual, that person should get their wage/salary too, so experience/loyalty etc gets factored into that.
They aren't a perfect company by any means, but they seem to be decent from current observations.
I think it helps people feel like they are benefiting from the company growing and doing well.
I think it increases retention because you are less likely to leave if a bonus is coming up.
If a company has a really bad year it helps them weather the storm without having to fire people or cut salaries.
Best I know of was every three months as that's roughly the latency to change jobs - after a bad day in the office, the next reward is still close enough to distract from the alternatives.
Also, I generally have low opinions of coworkers who do anything else. Those desperate for recognition usually sacrifice something else in the process.
I don't think "ideal" is possible, but if you have to choose whether valuable employees in average stay longer than they'd want or leave earlier than they'd want—longer is better for the business.
During my most recent company's negotiation, I was honest I wasn't going to do that again for that reason. Ended up negotiating from a 70/30ish split to a 90/10ish.
Right after the bonus is paid.
I understand the theory of aligning incentives, but in practice what I see is a bunch of perverse results. Rest-and-vest as well as all sorts of non-useful stress in times like these.
For normal employees, it's just a form of pay with extra hoops. I suspect much of these started with ways to get "around" cash flow requirements, etc, but now the accounting rules have caught up and it's not really worth it anymore, for anyone.
I think a lot of people in the Bay Area who work at large and small companies have benefited from rising stock prices and large amounts of their pay being equity. Look at the price of Apple stock over the last few years. Even a normal IC at Apple has made significantly more money due to their equity compensation being granted over 4 years.
There are also many people who have been normal IC level employees at companies like Snowflake who gained tremendous wealth by them going public and being paid in equity. Sure there are some losers, but I think over a large sample size employees generally win by being paid in equity vs the cash price at the time equivalent.
It ALSO allows them to "pay" people the same even though total comp may be very different, (this looks good on reports about pay equality) AND it allows them to institute pay cuts without ever having official pay cuts.
What matters is expectations of profits going decades into the future and the relationship to the risk-free rate of return (which has risen dramatically recently, due to the expected future devaluation of the dollar).
(I mean, I know why; equity compensation is a much cheaper way for a company to compensate employees than extra salary or even bonuses.)
I think shared-success is a fair model (regardless of whether or not it's good for morale or productivity) when the company is small enough where you can at least somewhat understand how an individual employee's work contributes directly to revenue. But companies grow past that point, sometimes quickly.
Having said that, I think I made out very well with equity comp at my last company, much much better than I would have done if there was no equity comp, and we all just had higher salaries. But I think that outcome isn't common, especially when you only consider employees in non-executive positions.
The equity compensation at Apple is ridiculous. For one they're super stingy with it. Thanks to the infestation of stack ranking only the top quintile or quartile of employees on any team (by whatever performance metric the manager decides upon) will get any RSUs. Upper management has no problem if all the RSUs allotted for a team go to only a single team member. There's a reason Apple really hates the idea of employees talking openly about compensation amongst themselves.
Logically this also applies to any form of compensation, say, your wages. (Hence the derogatory term "wages slave" from these who can afford not to depend on wages.)
The old recipe for that is to "pay your engineers so much money they won't know what to do with it" (can't find that quote from 1980s), but the realty market has adapted and likely made this a largely inefficient strategy.
The rest of the day is mine. I do what I want and don't feel regret about whatever I decide to do.
Second, they make a lot of claims that at least go against my understanding of psychology - and with no citations, only mentioning their own book as a "source" at the bottom.
The book has hundreds of academic citations. IMHO it's the single most important book for any entrepreneur to read.
Actually, bonuses are mostly a way for a company to be flexible in the amount paid to employees. If the company has a bad year, cutting salary will have people looking for the exits... but they might accept a smaller than usual bonus.
As an outsider, one guess I can make is probably they expect you to work hard to secure promotions within those three years?
The large signing bonus for year 1 and year 2 is structured to make up for the back-loaded vesting.
A related hypothesis: There is an asymmetry because overvaluations do not have an equivalent motivating effect as undervaluations have a demotivating effect. Boni without an objective measure are therefore on average rather demotivating.
I am sure I will get downvoted here and don’t care. Three decades of experience watching unfettered software engineers get it completely wrong overrides your derision.
But, I think it speaks to the general quality of the software engineers produced today more than in the past. 20+ years ago, I think software engineers were more talented and perhaps more capable of directly interfacing to the business without the middle men.
So it’s kind of what came first, the chicken or the egg.
In the 80s and 90s, I recall 9/10 pro devs were exceptional. Today, by my generous estimate, I’d say 2/10 would measure up to those folks I worked with back then.
Again, thats just my experience, but I am an old man nearing the end of my career who yells at those damn kids who keep playing on my lawn nowadays, so take it with a grain of salt.
In my subsequent 25+ years working in software (QA, Developer, Architect, Executive) the closest thing I’ve found is ownership participation (Options, ESSOP, etc.) which is too often a bad deal for employees because of various investor hijinks but generally helpful in creating alignment in both growth and efficiency. I’d prefer a bonus calculated based on the sum of growth and margin since it likewise creates alignment on the things that matter (in capitalism) but it’s very rare to find others that agree and support such a program at the investor/owner level.
So according to the article we can start taxing everyone 100% once their income is above a certain level.
And the output of the economy will be better.
As an example: I choose to work at a job that pays less than I could get elsewhere because there are intangible benefits that matter more to me. I'm able to do that because the market is free. Within the company, I fight to keep those intangible benefits prioritized because I know that they are a major selling point that will get us engineers when we can't afford to pay SV wages. That's the free market at work, but money and incentive schemes don't factor into it at all.
Of course it is not black/white like that.
But people keep telling me that the free market is so much better than communism because there is an incentive to work (money).
However, it seems, the truth is somewhere in the middle, and it seems closer to communism after a certain level of income has been attained.
That is, according to the theory in this article.
The primary ideological conflict between communism and the free market isn't over money, it's over whether it is possible for a centrally-organized economy to outperform one in which people are left to pursue their own self-interest as they see fit. The article doesn't address this question at all.
(As an aside, central control versus free market is obviously not an either/or choice, and most countries' policies end up somewhere in the middle.)
And in any case, "the free market" != "people are only motivated by money". All "free market" means is that voluntary exchanges are not regulated or restricted by the government. Indeed it has nothing inherently to do with money, if you want to trade your labor for a pile of corn that would be a perfectly fine free market transaction.