How to do incentive-based bonuses?

Question

Our organization is interested in doing some incentive for the bi-annual bonuses. We have a bunch of ideas that we don't love. We're a small company, but have 3 branches: customer service, development, and operations.Some of the ideas we don't love:- Based on our score in an industry survey. But the survey doesn't come out until a few months after the year end bonus, and changes to the survey could cause a drop in score that is not tied to our customer service.- Setting and meeting goals. In Ops we often set goals that are "stretch" goals, but they slip because of day-to-day keeping the trains running. We don't want to incentivize against keeping the trains running. Similar issues on the dev side of the house.- Uptime of services. We are doing a good job there, so should be a slam dunk, but also we have limited ability to influence much of what goes into availability. Spending on hardware and facilities for redundancy to address our most likely large outages is not something the people getting the bonuses have control over.- Productivity. The real issue is how do we measure productivity? I'm probably the most "instrumented" team member, I keep a journal of everything I do every day, 18K line text file, but I'm sure I couldn't tell you if my productivity this quarter was higher than last quarter.Any clever or proven ways to do incentive-based rewards that you've had work for you and your team?Any processes that clearly have NOT worked?

foundry27 · Accepted Answer

When employees can&rsquo;t see how their day-to-day actions influence the outcome of bonus decisions, they lose engagement, and it undermines your credibility. At the same time, when individual KPIs pit people against each other (e.g. the dev team is rewarded when they deliver on schedule, while ops is rewarded for cost savings that might slow dev productivity), it breeds conflict and silo mentality. Which sucks for all involved!The &ldquo;best&rdquo; solutions boil down to economics IMO. In a smaller org you can probably get away with directly tying a % of the bonus to overall company health, which is as authentic and controllable as it gets if everyone&rsquo;s trying to make the business a success in an interdisciplinary way. In a larger org you might need to measure proxy metrics that are correlated with that overall company health function but more closely aligned with the core missions of each department. Pick out a handful of KPIs per department, but weighted so no single number disproportionately influences the outcome. Smaller numbers of carefully chosen, stable metrics that the team can influence build trust over time.

magicalhippo · Answer

Currently in a small B2B software company. Bonuses were introduced as an alternative to dividends, as just a few employees had stocks. As such, the total bonus amount was directly tied to the total amount of dividends paid. The amount paid to each individual was determined by a few discrete levels, based on seniority and such.
Thus, higher results typically meant higher bonuses, and it felt transparent and predictable.
However, after many steady years we're now in a high-growth phase. So results are down due to many new hires, and consequently bonuses are down.
Due to our change of pace, they're changing the bonus system next year.
Back at my first job the company had a target-based bonus system. It was a bit dumb, because they couldn't bother seasonally adjusting the budget, just divided the target by 12, while activity flat-lined during July (summer vacation here) and peaked heavily in December (customers spending what's left of budget before end of the year). So we didn't really know how well we did until the end. And, as my boss mentioned when we were quite behind, the the target was set fairly arbitrarily at the start of the year anyway. Overall not a great way to do it.