Founder in Eleven

Managing all of the different components to employee compensation (salary, bonuses, options….) can be a difficult balancing act for a small company.  Technology Services Group (TSG) developed a manager bonus program based on team goals rather than individual goals, which drove employee retention and enhanced team culture.

Why Include Bonus Goals in Management Compensation?

In a competitive job market, providing bonus compensation can help reward, attract and retain talented employees.  With more employees gravitating toward smaller companies, large companies have to up their competition by promoting perceived benefits during recruitment, including:

• Large companies are more stable than small companies.
• Large companies are better resume builders.
• Large companies are better at compensating with   options and stable bonus payments.

Smart founders should look for ways to turn the above perceptions into strengths for small companies when competing for talent.  At TSG, typical recruiting messages would include:

• Small companies like TSG are nimbler and more flexible than large companies, which results in less mass layoffs and reductions in force, as well as decreased burnout from overtime and/or travel.
• Small companies like TSG provide a deeper exposure to all parts of the business using newer technologies, which are better resume builders.
• TSG has both ownership and bonus compensation with a history of consistency.

For TSG to compete with larger firms, we needed to provide both bonus and options.  TSG viewed options as a long-term compensation component for those committed to the firm.  (For more on options/ownership, review our previous post on “Embracing Employee Ownership”. ) For bonus, we were looking at both a means of rewarding employees in the short-term for exceptional performance, as well as vary compensation for management staff based on the financial results of the business.

Creating a Bonus Structure

TSG evolved to focus on bonus as more up side for manager compensation.  We felt that less experienced employees (0-4 years’ experience) should get more of a guaranteed salary since they are beginning their careers.  As the employee entered the management team in the 5^th year and beyond, more and more of the manager compensation would be bonus as well as ownership.  Components of the bonus structure included:

• Paying our quarterly bonus based on hitting of quarterly goals.
• Starting small with maybe 5% of overall non-ownership compensation for the bonus, extending to as much as 33% of non-ownership for senior managers.
• Averaged about a 50% payout. 

As a management team, we wanted to set stretch goals where it was hard to hit 100% payout to avoid any entitlement about being “owed” all of the bonus. For example, if a manager had an annual $40,000 bonus potential, they would have a chance to earn $10,000 every quarter.  If the team hit 50% of the goals quarter, the manager would be paid out $5,000 that quarter and $20,000 for the year if they hit 50% every quarter.

What’s Wrong with Individual Goals?

Early on at TSG, we worked with plenty of software sales representatives (Documentum, EMC, Alfresco…) that had compensation almost exclusively on individual goals and commission.  Later, when TSG was purchased by Alfresco, we often heard the term “coin operated” to describe employee motivation on how best to align company monetary goals with individual goals.  What we observed at these companies that we didn’t want at TSG culture was the mistake of focusing on the individual instead of the team.  Some observations included:

• Individual goals didn’t promote teamwork as individuals were always jockeying for themselves versus sharing credit with the team.
• There was a short-term focus of meeting a quarterly bonus/commission goal in the last week of every quarter, often with considerable sales pressure and excessive discounts to the customer.
• Management at all the companies often struggled to fairly recognize good individual performance.  For example, a bad sales representative that inherited a good customer, industry, or region would be rewarded and compensated for that assignment.  A good sales representative that worked hard to land a new customer on their own but wasn’t able to close the customer by the end of the quarter would receive nothing and might have the client reassigned the following quarter.

Individuals that are “coin operated” Individuals are fairly common in most software firms that often have considerable turnover in the sales organization.  For a services firm like TSG, our focus was on long-term customer relationships as well as a high performing and experienced team that trusted one another.  We all felt that having a competitive individual “coin operated” bonus would not support our long-term culture and team goals.

From ChatGPT on “Why Are Team Goals Better than Individual Goals”

Team goals are often better than individual goals because they promote collaboration and teamwork. When individuals work together towards a common goal, they are able to share ideas and resources, which can lead to more efficient and effective problem-solving. Additionally, team goals can provide a sense of shared ownership and accountability, which can lead to a greater commitment to achieving the goal. Team goals can also foster a sense of belonging and camaraderie among team members, which can improve morale and motivation. Overall, Team goals align and direct the efforts of the team members towards a common objective, and thus achieve a larger outcome than what an individual could have achieved alone.

Creating Team Bonus Goals

In creating our team bonus goals, we evolved to have two main components.

• Short-term – Bonus goal would be based on the financial results of the quarter as a team.  The short-term bonus was often 80% of the overall bonus and would be based on two quarterly goals: hours billed and sold work. This bonus was split evenly between those two goals.
• Long-term – Bonus goal would be based on a long-term objective including R&D, or by obtaining a strategic opportunity.  The long-term bonus was typically 20% of the overall bonus.

During our all-day quarterly manager meeting, the management team would review the results of the quarter and together set the bonus goals for the next quarter.  One benefit of “Embracing Employee Ownership” was that the management team would not set easy goals since, acting as owners, they felt that the goals should be stretch goals.  Here are some of our goal setting observations:

• Hourly and sold work goals were typically set at 10% more than previous quarter goals, regardless of whether the goals had been achieved in the previous quarter.  For example, if we had a goal of 3,000 hours and only billed 2,800 hours, the goal would be set at 3,080 hours for the next quarter, not 3,300 hours.  Even though we expected growth, we wanted realistic goals that could be achieved every quarter.
• Long-term goals evolve overtime.   For example, as we developed a new product offering (NoSQL for example), we would set goals of “Sell two NoSQL customers for 10% of long-term goal”.  In this manner we could vary these goals quarter by quarter.

Benefits of TSG Team Goals

Since all the goals were set by the team during the quarterly meetings, TSG did not have any issues with individuals not sharing client opportunities or credit and would go the extra effort help their teammates make short-term and long-term team goals.  Management didn’t have to be involved in any individual disputes regarding which member should get credit for a customer, or have to mediate conflict over which manager was assigned which client/R&D activity.  Since all goals were very specific, management didn’t have to get involved in an interpretation of whether a goal had been achieved.  If there was a grey area regarding a goal (e.g.  “Did the NoSQL customer book in this quarter or last quarter?”) we would typically lean to the positive and reward the goal.