I worked at a company that had a yearly bonus. Actually I’ve worked at a few companies, but this one in particular set a plan in motion in January of one year. This plan was structured as follows:

• Meet a target of xx revenue for the year
• Achieve a yearly profit margin of yy%
• Have no unprofitable quarters

I don’t remember the exact targets for xx and yy, but they aren’t important. Most employees I knew thought these were reasonable goals, would require some work, but not an extraordinary effort, and were fair. People were excited, and despite a slow economy at the time (this was around 2002), they worked hard.

Until April.

When we released our Q1 results (we were a public company), we hadn’t had a profitable quarter. Management gave us the usual story about being upbeat, we can still pull together and work hard, and we’ll have a good year.

Anyone want to guess what happened with moral?

Salesman still pushed hard, after all, they have a separate bonus structure called a “commission”. Most of the rest of the company was a little disillusioned. Not that they looked to quit, or stop working, but there wasn’t an incentive to work harder than necessary. Executives were mystified, they pushed harder, complained, and tried to motivate people.

I found out later that executives had a different bonus structure than the rest of the company, which is something else I need to write about in another post. So they were on track to still make bonuses.

Many employees, however, checked out for the year. “We’ll hope for bonuses next year” was the consensus for most people working there. The #3 item for our bonuses had been blown by a bad quarter, which meant that there was no longer an incentive to work harder.

Granted employees owned stock, so they would still get some benefit from a profitable company, but most don’t own enough stock, and tend to hold onto it, so this doesn’t provide any short term incentive.

And that’s what a bonus is, a short term incentive.

What could be done better? First, a bonus should stand on it’s own in a period. Each part of the plan above should have been assigned a percentage of the overall bonus. If we had 1% of our bonus come from each quarter and the other 6% from the first two incentives, people would still be motivated. They’d have lost one part of their bonus, but not all of it.

I also think that having yearly bonuses, the traditional “Christmas bonus” is a mistake. It’s a long time for employees to focus on the incentive, and with the uncertainty in many companies and the lack of loyalty from both sides, it falls out two ways:

• You have to overpay to make it an incentive.
• You don’t overpay and people just stop caring.

In either case you aren’t necessarily building a good business plan.

My thoughts are that you should motivate people in short bursts, provide incentives to change behavior for short terms, make them fair, and change them often.