Tuesday, November 13, 2018

New INC Magazine Blog Post by Kaplan Institute Exec Director Howard Tullman

Five Rules for Getting the Year-End Bonus Right
A bonus isn't a gift and you aren't Santa Claus. You need to reward performance, not make the whiners happy.

Executive director, Ed Kaplan Family Institute for Innovation and Tech Entrepreneurship, Illinois Institute of Technology

Now's the time for you to start figuring out year-end bonuses. As much as you'd like to, you can't really put it off any longer being that December is right around the corner. Honestly, the whole deal would be so much easier and less stressful if we distributed bonuses in July instead of in the midst of the holidays. If you're a typical entrepreneur, though, your people are paid twice a month, which means that you've got to distribute their bonuses with their first check in December, so they have a little time to spend it on holiday presents.

I was going to say, "time to decide what to do with it," but these days the idea of "saving" some of that extra cash doesn't even enter into the discussion. These bonus payments are often pre-spent, which just makes the pressure greater on you to get the amounts right. This is no easy task in the age of over sharing, profound entitlement, exaggerated expectations, and dysfunctional transparency. As hard as you try and as diligent as you can be, a bunch of your people are still going to be unhappy.  Get used to it.

If you're a startup CEO who's even a little bit conscientious, and most of us are, you'll spend way more hours than you'd imagine stewing over these decisions, slicing up the fixed and often shrinking pie in a million different ways, and trying to do right by everyone.  Which, of course, is unrealistic and impossibly subjective as well. You'll work really hard to try to do the best job you possibly can.

You can collect input and suggestions from your board, your accountants and other team members (who, as a rule, are always willing to spend more money than the company can afford to take care of their own folks) and you can look at "industry" guidelines, which are usually just as useless. Because, especially at this time of the year, every business sits on its own bottom; has its own Rashomon history of the past year; and a big bunch of explanations, rationalizations, and "woulda, coulda, shoulda" excuses.

 So, there are no pat patterns, flawless formulae, or even good guidelines to really help you make these personal and highly emotional decisions. And, as you're sitting and sweating these decisions out on the Sunday after Thanksgiving, you'll quickly realize that this is another one of those "buck stops here" situations. If your business has had a lousy year, I guess it's a little easier to be more modest in payouts, but -- nine times out of ten -- those overall results weren't the fault or the responsibility of most of your hardworking employees. So, don't bother whining too much to them about the bottom line. That explanation might work better on the managers who truly understand the math -- but don't count of any of them stepping up to take a bullet for the team, either.  It's fair to say that baseball is still the only place in the real world where a sacrifice is actually appreciated.

Even if every case is ultimately a little different, there are a few things to keep in mind, and to learn from those who've suffered through the painful process over and over again.

1      There's no silver bullet and this never gets easier. On bonus day, you're gonna be sitting opposite a bunch of people -- one at a time -- who think that you have measured their value and worth as human beings, not just as employees, and converted that opinion into dollars and cents. A lot of heat and emotion is bundled into that bonus amount and you can count on some sparks flying during those conversations.
2      Percentages are a really poor proxy. Comp committee members and other experts are notorious for telling you (with little or no basis in fact or even experience) that bonuses in "a new business like yours" should be around X% of most employees' salaries. In my experience, this advice always results in dollar amounts that you'd be afraid to give your doorman or letter carrier. My advice is to build your bonus structure from the bottom up. Start with a dollar amount that you won't be embarrassed to present to your youngest and newest employees and go from there.
3      Making mediocre people happy is a good way to lose your best performers.  Trying to buy peace so you won't get a bunch of dirty looks and evil eyes at the office party is a bad bet for the business overall. Some people are alive only because it's against the law to kill them and some people deserve exactly what they've earned -- or not earned. And they shouldn't get one dollar more. Overpaying for peace sends the worst possible message to everyone and really discourages the people who are hitting it out of the park. Get in the habit of sacrificing the few, if necessary, to save the many. Always be raising the average.
4      Don't make promises you can't or won't be able to keep. It's easy, in your haste to get out of the room and end the conversation, to fall into the "there's always next year" trap. Please don't. First, because it doesn't really help the situation -- no one wants to be happy tomorrow. And second, because if you really think things are unlikely to improve, you're just delaying a more difficult and more critical decision. And, by the way, when you say to yourself that you don't know about a person, the truth is that you do. Try to always be able to say that your average employees now work somewhere else.
5      Buckets are much better than brackets or bands.  Using systems of brackets or bands for comp or bonus determinations are okay, but they often miss a very central consideration, which is that some of the most impactful and important people in your business could have relatively low salaries.  So, the pure math can be misleading, but in your heart and your head you know who these people are. And that's why I like the "buckets" approach. Start the whole process with 3 big buckets. Bucket 1 is for the best people in the business-- wherever they are and whatever they may be earning. These folks need to be rewarded. Bucket 2 holds the vast majority of your employees and hopefully they're doing more than their fair share and contributing. These people need to be recognized. Bucket 3 is for the people who are just doing their jobs and not much more. Frankly, if they aren't getting better, they better be gone. These people need to be reminded. Use bonuses to send the appropriate messages to each group.
And one last reminder. Don't take it personally if employees aren't grateful or thank you. That's just another part of the job.

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