Ditch the Bonus.
Give your team money, just not based on performance.
I’m not going to be so bold as to say that *you* personally are doing this, but there are a fair number of *you all* out there that fling bonuses around to your team without clear structure or reason. And my hunch is that this is more about dopamine (it feels really good to give people money!) than a well thought out incentive or reward program for your team.
I’m all for giving employees money, but the way you go about it has an outsized impact on your team culture. So let’s not be random about it, and let’s not base it on something we’re not tracking very well to begin with— random risks eroding trust.
What I think you should do instead is redistribute company profits to your team, with a lot of transparency, and based on team contributions.
When you talk about profit distribution, you have to articulate what actually impacts profitability and collective success for the company.
These conversations facilitate collaboration and trust.
John interviewed me about why I don’t think you should be giving out performance bonuses, and why I think you should consider distributing profit instead for this week’s Whiskey Fridays episode. Listen to our full conversation here:
Or read my footnote’s version:
Ditch the Performance Bonuses
Performance-based bonuses are the traditional, (usually) end of year extra paycheck bump, where good work or positive performance are rewarded. There’s often a tie-in to company performance, but the bonuses are tightly tied in some way to individual merit.
1. The most common rationale I hear is “so-and-so worked really hard, so I wanted to reward them.” This hard work = bonus equivalence can lead to situations where a team has worked their asses off, but there are not resources for bonuses. Hard work/exertion does not clearly correlate to a profitable year! It can happen that way, but sometimes teams are working their asses off because the company is not doing well.
2. Performance is individualized, with bonuses tied to individual performance metrics or as a reward individual “hard work.” More on this below, but very very few small businesses have a consistent structure for measuring performance, so there’s likely a heavy dose of subjectivity here.
3. Usually not all that transparent— unclear who got a bonus or not, or what the metrics are to determine bonuses. Your people talk more than you know, and if there’s anything about how you distributed money that doesn’t feel equitable to the team, they’re going to sniff it out.
4. Traditionally given out at the end of calendar year before the books are closed — so you might not have your full tax obligation figured out yet.
Instead, Distribute Company Profit
Profit Distributions are payments distributed to team members based on the full company profit for a period, and based on contribution instead of merit.
1. Profit frames distributions around collective success— numbers are tied to the overall financial health of your company and each member’s contribution to that success.
2. This framing opens up a conversation about what factors actually impact company profit (because we know it’s not just hard work!). Did you fund a lot of growth or invest in hiring? Did you lose or gain a large client? Experience a global pandemic that forced a shutdown or led to a surge of revenue?
3. Facilitates transparency around your pool and calculations, so everyone knows how you came up with the final numbers (though you won’t necessarily share individual amounts). I talk more in depth about calculations in the episode, but you’re going to do it based on some combination of tenure, how much someone worked (full time or part time, eg), and perhaps some customized factors.
4. Often post-tax, distributed in Q1, so easier to account for the full financial picture.
Three Notes
1. You still need to manage performance.
I’m not saying don’t manage your people, I’m saying that the majority of founder-owners of small business are not consistently tracking performance metrics, and our businesses are very heavily tied to our personalities...so I just don’t think folks should be setting up compensation based on a system that you’re unlikely to maintain well, and that has a high chance of being heavily influenced by owner predilections.
I mention in the episode that my partner worked at an agency where every year the owners would take a select group of favorites off to a special holiday gathering at a private club and shower them with expensive presents…while leaving everyone else toiling at the office. It made everyone involved feel like shit. This wasn’t so much performance-based, as stark-naked favoritism. Some years you were in, some years you were out. If you’re flinging “good job” bonuses around, it may not come off this egregiously, but anytime you, the owner, are letting your subjective opinions of people interfere with how folks are paid, you’re risking trust and team belonging.
The other thing about tiny teams is that everyone should be in the right seat and able to succeed in their role, you just don’t have space for someone to sit in the basement fondling their stapler.
You should be providing all sorts of feedback on a regular basis. Setting clear expectations. Holding folks accountable to those expectations.
But don’t tie additional compensation to whether someone is performing to your expectations or not. You’re just going to wreak havoc with your team culture1.
2. Mechanics are the same, the context is radically different.
Functionally, how these are paid out is exactly the same, bonuses or profit distros are going to be added to a payroll as additional compensation. The entire context is different however, and that’s what matters here.
3. If you’re a younger company, and/or still figuring out profit…
Don’t sweat it.
Make sure you’re paying yourself a full salary first.
Don’t start a profit distribution program if you’re wobbly on profit. Team profit distros are a fantastic accountability mechanism, but not if you implement too early. Figure out your business model first.
You, the owner, also receive distributions. In most cases, they’ll be a separate and larger pool than your team’s.
What if you don’t have profit to distribute?
1. This is an opportunity to make clear what collective or business factors impacted financials! Give the team the big picture.
2. Decide and communicate if you’ll revisit later— does it make sense to check back in June about company profit?
3. Give out extra PTO or vacation time, or if you can swing it, close for a week-long company summer break. For most businesses, vacation costs you nothing.
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Every once in a while I talk to someone about distros and I get a “but I don’t want to reward ____!” protestation...and that protest is always an admission of some sort of team performance or fit issue that they’ve let fester. If there’s someone that you really don’t think deserves to receive the fruits of their labor, why are they still on your team?