Bonus programs

Don’t forget Goodhart’s Law

When a metric becomes a target, it ceases to be a good metric.

What kind of bonus programs have you seen, and what sort of tradeoffs do we see with them?

Flat amount for all.

Tied to OKRs.

Too gameable and rewards aiming low.
Also creates conflict between what is good for the business and individuals.
Focuses on output over outcomes.
When those goals get specific about the work, they almost always drive poor outcomes because the needs of the business and team shift and you have incentivized individuals rather than team coordination.
That 100% depends on how easy it is to game the OKR’s and who’s paying attention to KR’s that are being set at the beginning of the quarter. In my experience, everyone is pressured to set BHAG-style KR’s because books and then there’s a 10% chance that you’ll actually hit the BHAG, which completely misses the point of the motivational bonus.

Profit sharing, or tied to overall financial performance of company

Kind of nice, but also a little diffuse.
Not particularly motivating or effective. For example ARR feels disconnected in time from the team’s work.
I’m a big fan of profit-sharing btw. In my opinion, it changes the framing and solves a bunch of challenges with the optional bonus structure approach.
There should be a bonus structure for every employee… ie: if the company does well, we should all benefit… and if the company doesn’t do well, no one should get a bonus, especially execs.

Tied to departmental high level metric

One company’s approach: “Company plan has a small number of high-level annual plan goals: target ARR, total # customers, NRR, new logos acquired, etc. Folks in leadership roles are bonused on % attainment of the plan number most currently relevant to their department.”
When those goals get specific about the work, they almost always drive poor outcomes because the needs of the business and team shift and you have incentivized individuals rather than team coordination.
Downside, speaking from experience, is that those numbers strike at the heart of pricing / packaging / strategy decisions, ie: if I was in charge of product / eng where my mandate was “increase the # of logos”, I would push incredibly hard on low cost / ease of use / SMB / growth, etc.. but at the exact same company, in sales, with a bonus on ARR and likely with a bunch of field reps, I’d be pushing for enterprise features / larger deal sizes / and putting all kinds of downward pressure on CSM’s and engineering to deliver for my larger deals… so while it feels like a nice mix, it also introduces a massive incentive disconnect between prod / eng and sales / csm who both would be driving at opposite ends of the spectrum.

Leaders have shared high level metrics

At another company, the setup was similar to what departmental high level metrics, but the goals and payout were shared across leadership and did not depend on department. There were 4-5 KPIs and bonus was determined by computing a combined attainment. Since there were a mix of goals, there were some where each department had more direct influence. But at the end of the day, they were company targets and we won/lost together.
The other thing this company did was define for each goal both an aspirational target and a minimum target. There was a linear ramp between minimum and aspirational. The understanding was missing the minimum was a serious issue, missing the aspirational was not.

Define their purpose — what job does the org want the bonus program to do? In many cases, I suspect the costs of the program don’t add up to the delivered benefit.
“I just don’t like bonus structures at all. As others have said, once you tell people there is optional money they can get, their goal becomes to figure out how to get it. And that incentive is likely to override whatever context you try to wrap around it. And you also buy yourself a whole set of headaches around explaining to people over and over why they didn’t get the bonus they expected. My preference is to make people’s compensation as unambiguous as possible. That does lead to a whole conversation about how to ensure you still pay competitively.”
“I’ve often been burned by executive bonus programs. I basically don’t trust them at all.”