Managers count on team members to be productive every day. And to ensure commitment to the work, organizations create incentives based on compensation and bonuses. Determining how big bonuses should be can get complicated and expensive for organizations. George Georgiadis, an associate professor of strategy at Kellogg, has a suggestion to resolve that problem.
The Bonus Pool
In many organizations, senior managers meet every quarter, six months or annually to discuss the bonus pool. Who should get a bonus? And which employee deserves a larger bonus?
Managers don’t make these decisions based on a gut feeling. They collect information. They make use of performance appraisal documents. When there’s a dispute about how large the bonus should be, they might turn to peer review documents to see what other team members say about an individual. If there is still resistance from other managers about the size of a bonus, a leader might turn to customer feedback on a specific employee.
By the time managers review and negotiate on this topic, they've burned through hours that could have been applied to more pressing problems. And the outcome may not always be what managers hope for. We all know that employees compare this kind of information. And when they do, we can be sure someone will have a complaint about why their bonus wasn’t larger.
The Fixed Bonus
Georgiadis and his colleagues recommend that organizations turn to single-bonus contracts. In this system, employees get a base salary. And if their performance is deemed satisfactory, they’re granted a fixed bonus. They know the value of this bonus up front. This model allows “employers to provide their workers with strong incentives while varying their pay as little as possible. And having relatively consistent pay is an important factor for keeping employees happy.”
Keep in mind that the fixed bonus system works best in smaller organizations. That’s because these organizations tend to evaluate employees individually when bonus season rolls around. Employees might be able to ‘game’ the fixed bonus system, by working hard early in a measurement period to achieve goals and then slack off. As a manager, you can watch for and correct that tendency.