The founder instinct
As founders who run an awesome company, we love our teams and we want to share the spoils.
We certainly don’t want them to see those proposal values increasing in size and think that we are keeping it all ourselves (as if).
So we want them to feel the benefit, and have some skin in the game, and maybe one day that will help us step away a bit.
Our problem-solving mind lands on bonuses and profit share, and it feels simple.
You don’t look up how a bonus works. You just give someone a bonus, and then they’re happy.
But like everything, there are gotchas and traps.
Maybe it’s not even you deciding to do a bonus. Maybe it’s your team coming to you, talking about how they’d like to be incentivised.
I’m a huge fan of making it up as you go along, except when the consequences are hard to change.
When it comes to money, once you start giving something, it’s hard to take it away.
A bonus isn’t a gift, it’s a strategy
The mistake is to think that a bonus is some kind of gift. There’s money in the account, let’s give it to this hard working person so they feel happy.
Actually they are an investment and you need to use them strategically. Like everything you spend, you should get something back.
So what do you get back? A few things you might be trying for:
- You make it clear you appreciate someone’s effort when they went above and beyond
- You want to ensure someone performs well consistently
- You create a sense of team and shared achievement
- You want people to care as much as you do so you can step away
These are different goals which require different investments.
To invest well you need to understand the types of incentive (some of them aren’t strictly bonuses). So let’s spend the rest of the article running through the types you need to know (including a type of reward that I think is a small agency’s secret weapon).
Commission
Commission links someone’s compensation to an aspect of their performance. The classic is a salesperson or account manager who gets a cut of the revenue or profit on the deals they win.
Here’s the mechanic. The base salary is acceptable but deliberately, slightly unsatisfactory. They expect, and you expect, that they’ll earn enough commission to turn it into the wage they actually want, and then go beyond it.
It works when the thing you’re incentivising has no real upper limit. Revenue is always good for most businesses. Yes, there’s a ceiling on what an agency can deliver, but that’s a nice problem to have, and you wouldn’t want to turn off the tap. High performers earn proportional to the value they provide, so you retain them without overpaying.
It doesn’t work so well elsewhere, because of the message it sends. Put a sysadmin on commission for uptime and you realise you can’t beat 100%. There’s only downside for them.
You also get exactly what you incentivise, so be careful what you set. Set contracted revenue as the target and qualification slips, because once the deal’s signed, the person earning the commission doesn’t care if the project goes well. So, often you’d structure commission on revenue over the first six or twelve months, so the value is actually realised before you pay out, which makes a salesperson more discerning about the deals they chase.
Commission only works where a person links very directly to value. Which is why it makes less sense for an engineer or a designer. They aren’t responsible for the rate that was set or the scope, and they’ve got less control over the revenue of the deal.
Profit share
Profit share is a regular cut of profits shared out across the business.
You use it to give people buy-in, to get a higher level of effort and to make them more proactive about finding opportunities. It sets a tone: the business is driven by profit, and everyone shares in it. It lets you push financial performance without it looking like something that’s only in the owners’ interest.
Things to consider. It’s normally spread across everyone, which means the person giving more effort and the person giving less get the same bonus. That can breed resentment, and the bit going to the person doing less is wasted money.
Profit also isn’t fully in the team’s control, because it’s influenced by costs. Decide to invest and make less profit this year, and you’re stuck either telling staff their bonus is down, or doing accounting gymnastics to strip that cost back out.
There’s a version that looks at delivery margin instead, the profit on the project you’re actually working on rather than whole-company profit. That solves some of the control problem, but some projects make more than others, and now you’re heading towards a complex scheme.
And people grew to expect it. And as soon as a bonus is expected, it stops doing its job, and on a quiet quarter you get a double whammy: less money in the bonus and a sense that things aren’t going great. So watch out, profit share means being more open with performance. That doesn’t have to be a bad thing, but you need to be ready to communicate at that level.
Performance-related bonus
Then there’s the performance-related bonus for an individual. It’s different from commission, because there’s no revenue number to link it to. It’s normally tied to a target, like client satisfaction.
The pro is that you incentivise a specific outcome, and you should see that outcome improve.
The thing to consider is where the performance of the role stops and the “above and beyond” begins. You’d hope someone who’s there to achieve an outcome would want to do it to the best of their ability anyway, without the extra incentive.
Are you just paying someone more to “do their job”?
And that cuts both ways, if a team member is doing their job to a consistently high standard wouldn’t they be right to expect you to commit to a pay rise?
They will end up expecting it, and then the month it doesn’t happen, it’ll feel like a pay cut.
I’m being down on these, they can work if you design them well, just don’t decide to do them on a whim and expect to avoid unintended consequences.
The ad hoc bonus
This is the one I think I’m most in favour of. You spot when someone’s gone above and beyond, hit a milestone, shown real loyalty, or when you just want to make an example of them and make them feel appreciated. A surprise bonus really does the trick.
An unexpected bonus is a wonderful thing. It’s literally the definition of the word. Something on top. Something that perhaps wasn’t planned for.
The thing to remember is consistency. If they go above and beyond again, are you going to do it again? If someone else hits the same milestone, do they get one too? Because as soon as you’ve got a standardised trigger, it’s a scheme, and it falls foul of the rule that an expected bonus isn’t really a bonus.
So, again, you can do this, you just need to be ready with answers to the above questions. And they can be open and honest.
“This is a one-off discretionary bonus to recognise a moment of brilliance that was valuable to the business.”
or
“u done well”
An incentive needs communication, none of the types work if people don’t understand why.
Non-financial rewards
The secret weapon I mentioned above.
Remember that as a small, flexible company you can provide opportunities.
Not everyone is incentivised by money. And given you probably can’t pay absolute top rate, the people who are purely money-motivated probably aren’t in your business anyway. Ask yourself if you’re motivated by money. Potential big exit aside, you don’t start an agency to guarantee yourself a big month-to-month wage.
Remember that when you reward people. Training and opportunity are sometimes the reward they actually want. Someone stepped up and went above and beyond? Put them on the next big project. Hand them responsibility as the reward.
Or training. Training is like a bonus, except it also says: we’re investing in you. We don’t just want you to go home with a couple of hundred quid. We want you to get better, to grow this company, and to see your own career flourish.
The right people will grow when you reward them by trusting them. Your best people aren’t unicorns, they’re people you backed. That’s why they are here.
Equity and share options
A final one, because it’s not strictly a bonus, but it’s a related financial incentive. Equity, share options, whatever the mechanism: you give someone the chance to take a share if the company sells.
It’s good when it can be a meaningful amount, and it might be something you restrict to your leadership team. Symbolically it creates buy-in, and you hope, retention.
This is the one that will truly let you step away and have others be fully motivated to take you on to your goals.
But it’s only any good if you’ve actually got a plan to sell. Otherwise you’re just telling people they’ve got a cut of something that might never appear.
That’s a bigger thought right?
One to go deeper on another time.