One of the biggest mistakes I ever made in business was yanking away a solid company bonus structure. For several years, as CEO and sole shareholder, I’d created a structure based on company performance: 20% of all profits would be shared with everyone shared equally regardless of position or salary. There was no “entitlements” in this model, and if we made little profit, little was shared. I communicated monthly numbers with the team, and each team member held plenty of sway over spending and and knowledge of profits.
I remember a time when I announced that I’d be looking to hire another team member to ease the team workload. The silence was suddenly broken, when one of the employees spoke up. “Hey Dave, if we hired this new person, we’re going to have to split the profits with another person, right?”
“Right”, I said. “Then thanks for thinking of us, but we’re OK for now”.
Interestingly, the year after we implemented this bonus structure, and for four years even through the Great Recession, our profits grew every year by 20-30%.
Then the wheels fell off.
Upon a business merge, I was convinced to replace our collective bonus structure with individual bonuses. Ok, “convinced” sounds like they forced me at the point of a gun to change the model. I was part of the ownership that agreed to implement it.
The bonuses were based on individual metrics, and unrelated – at least directly – with company profits. The individuals could have made more money through this individual system.
Within the year, our company profit plummeted, followed by an employee turnover increase of over 50% over the next two years. You may think that at least the star performers remained, but this was not the case. Many good people who exhibited our core values and were good at their jobs left, too. Ouch.
I didn’t realize this at the time, but as a leader, it was my job to foster and encourage team identity. By taking what was a collective bonus and replacing it with individual bonuses, we began to realize that the culture shifted from “us” to “me”. No longer did team members have to collaborate to succeed. Plus, there was no incentive for individuals to look out for the best interest of the company.
A silver lining – we began to implement EOS, The Entrepreneurial Operating System ®.
Luckily, we discovered and began to implement EOS, short for the Entrepreneurial Operating System®, a simple and quick to implement business system for entrepreneurial companies, that builds healthy and smart teams, in order to have clarity, alignment and focus.
During t EOS Process, we were able to flush out the real issue and recognize that it is important to hire the right people, AND to reward them the right way, too. We set company goals, shared them, then worked weekly, monthly and quarterly towards those goals. We created a few weekly company metrics, and then set related individual metrics for each individual, then gave them the tools and accountability to reach them. We rewarded both the individual and the collective group. Profits soared once again.
Individual AND Collective Bonuses
Research shows that even selfish individuals become cooperative — and possibly altruistic — when they feel that they’re part of a group. So how do you strengthen your team’s identity and help grow profits again?
According to the study performed by Jay Van Bavel and Dominic Packer in Harvard Business Review article The Problem with Rewarding Individual Performers:
Reward behavior that advances the goals of the group, rather than the individual. Offer your team bonuses, recognition, raises, flexibility, and opportunities based on the entire group’s performance. To avoid free-riding, individual rewards should be given to individuals who make important contributions to the team’s success. This rewards indispensable team members — the unsung heroes who work late, cover for colleagues, and enhance the success of the group. Combining individual and collective rewards ensures that individual members are encouraged and motivated to pursue the team’s goals and help the team succeed.