January 21, 2018

Annual Bonus

Give this a read (click here).

I worked at Avenue A - one of the companies that took retargeting from theory to practice. I was underpaid relative to the market and was given significant equity. Six months into my employment, my equity was worthless and I was underpaid relative to the market. Three months after that, I moved on to Nordstrom.

You've got four levers you can pull.
  1. Salary.
  2. Benefits.
  3. Equity.
  4. Bonus.
If you are looking at where you on relative to the quadrants below, it's important to know which lever helps you achieve your goals.

Salaries are highly homogenized these days ... for the past twenty years, a handful of "compensation" organizations standardized pay to the point that jobs pay "x" and that doesn't vary by more than +/- 20%. So salary is, to some extent, irrelevant (I know, it isn't, but it isn't something that changes the story).

Benefits are going in the other direction ... some are improving, but across the board employees are generally getting less and less each year. You can compete here by offering better benefits, but employees aren't dumb ... they sum salary and benefits in their brain and they know what "true compensation" ultimately is. Benefits, by the way, are in the realm of companies that are in the SCALE quadrant ... if this is you, this is a place where benefits matter more than average.

Equity is in the realm of SCALE and UNIQUE. This is "selling the dream". You can become an Executive at a SCALE company and equity is going to be great. You can be a startup in the UNIQUE cell and offer the dream of getting rich someday. If you are in the BUY or SELL quadrants, equity is generally not something that makes a difference because it isn't offered.

Which brings us to the Bonus.

If you are in the BUY or SELL quadrants, the annual bonus is a huge motivator.

If you are in the SELL quadrant, you likely have a difficult time recruiting talent. The bonus becomes your point of difference. Bonus structure might look like this:
  • Analyst = 15%.
  • Manager = 25%.
  • Director = 40%.
  • Vice President = 75%.
  • C-Level Executive = 100%.
Bonuses should stretch employees yet still be achievable. Bonuses should be linked to key metrics. If you are in the SELL quadrant, bonuses should be based on annual Earnings Before Taxes, on Sales Growth, and on Personal Objectives.

Think of it this way. You have annual salaries by position.
  • Analyst = $60,000.
  • Manager = $100,000.
  • Director = $140,000.
  • Vice President = $200,000.
  • C-Level Executive = $300,000.
Now look at the salaries when max bonuses are paid out.
  • Analyst = $69,000.
  • Manager = $125,000.
  • Director = $196,000.
  • Vice President = $350,000.
  • C-Level Executive = $600,000.
Which company would you prefer to work at?

When the company exceeds expectations, employees share in the riches.

When the company fails, employees don't get paid.

If you are in the SELL quadrant, the annual bonus is the path to attracting and motivating talent. Yes, it requires the Owner / Shareholder to not get paid as much during a great year, but tough ... you are in the SELL quadrant and you'll get paid when you SELL, #amirite? So  you want your employees aligned with your incentives ... if they do well, they get paid today, which allows you to get paid well tomorrow.

If you are in the BUY segment, bonuses matter as well. You want to motivate employees at the recently acquired brand (or in-house startup) to do well ... and they deserve to share in the gains, right?

If you don't like the fact that it is hard to recruit people to your company, pay 'em. Pay 'em on a variable basis. There's no downside. So please discuss today what stops you from paying people to do great work, ok?

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