March 10, 2017

Bonus Time: Using Performance Metrics for Payouts

Bonus time can be particularly fraught with terror for managers and payroll admins, especially if no one has any idea how to calculate the bonuses.

I once worked at a company where quarterly goals were so vague and bonuses only tied to the founder’s emotions at the time of payout. In this situation, I felt safer assuming I would never get a bonus to avoid the self-esteem hit when the quarter closed. I also designed my own performance metrics without the organizational guidance and feedback of my manager. 

ALSO READ: 6 Ways to Reduce Employee Attrition that have Nothing to do with Beer

Bonuses should celebrate the achievements and hard work of individuals to further the larger company vision, not put everyone in a tizzy over perceived biases. When used correctly, a bonus structure can improve your company’s productivity and employee morale. Setting well-constructed team and individual goals tied to measurable performance metrics can ease some of this pain.

Start at the Top

While it’s easy to think you should start your metrics at the individual level, it’s really best to start with the company’s vision of success and build down from there. You’ve probably already defined what success looks like in general terms (“become the leader in the space” or “communicate with transparency”). So what are the metrics that prove you’re the leader or that you’re communicating correctly?

Once you’ve defined goals and measurements for the company, you can define the team contributions that will best serve these goals. Only then should you move on to individual metrics that contribute to the team and company success. This scaffolded approach to goal setting can help your teams keep the larger company objectives in mind and avoid rewarding team members for achievements that don’t contribute. 

Use your Existing Frameworks

You probably already have project workflows and deadlines in place that help you understand whether projects are on track (if not, you should look into project management software). Use these workflows to help you measure individual progress.

Some places to mine for performance metrics:

  • SMART goals (specific, measurable, achievable, relevant, time-sensitive)
  • Agile and Scrum methods with iterative and customer-focused productivity workflows
  • Kanban boards 
  • Personal time tracking apps
  • Project management software with burndown analysis (i.e. Gantt charts) 
  • That Excel spreadsheet of your accomplishments (I know you have one)

In this information gathering stage of the process, you might also find that you have no idea what data you currently have. Stay calm, and strive to build measurements that are tied to specific business objectives (those company-wide goals you so carefully defined at the beginning). You can bring in outside data to benchmark individual progress, but make sure those metrics align with company goals. 

Try to Achieve Balance

Expect a lot of pushback if you set unattainable individual goals. Striving for perfection or gigantic leaps will make people less likely to even try. Use past data and ask your employees to stretch themselves, but don’t expect miracles. Remember that obnoxious quote everyone’s 5th grade teacher had over her desk? “Shoot for the moon, because if you miss, at least you’ll land among the stars.” Reaching for an uncomfortable goal is more important than attaining one that’s too low. 

Low expectations will guarantee bonus payouts (yay!), but they’ll keep ambitious team members from stretching themselves. 

Find a Way to Measure Quality

When you start judging effective work vs. ineffective activity, you’ll open that Pandora’s box of how to measure quality. The measure of quality depends almost entirely on the type of work being done, but it’s also directly tied to company goals. Sit down with your team members to define what kinds of characteristics typify quality work. Then look at the ways those characteristics can be combined with quantifiable and measurable data.

“What the hell is Quality? What is it?”

– Robert M. Persig, Zen and the Art of Motorcycle Maintenance

HR software vendor Namely suggests using a quality metric like “how much work has to be redone?” Sales teams might base quality metrics on the average sale value, rather than the number of sales. HR teams might measure the longevity and time to onboard for new hires. Again, looking at those company goals before defining metrics will help to ensure performance connects with business objectives.

Think Small

Just as your employees have their own daily objectives, you should build performance metrics from a bunch of small, actionable pieces with plausible time frames. While yearly and quarterly goals are useful, they are huge time frames. Think instead in monthly and weekly goals, and aggregate data from there.

Week over week numbers may fluctuate, but a month is a long time to wait if employees go off the rails. OPM.gov stresses the importance of timeliness in feedback. Correcting employees who go off course sooner reduces waste, while positive feedback means more if given early.

Communicate

It’s not enough to just assign goals and hope people hit them. Follow up with each of your employees, and share successes and struggles with the team.

  • Communicate both up and down the chain of command.
  • Check in and gauge progress and roadblocks when smaller fixes are possible, rather than when problems start reproducing.
  • Keep performance metrics visible. You don’t have to take out a billboard, but do build dashboards where everyone can keep track of their progress.
  • Revise goals that are too easy or out of reach. You won’t always get it right the first time, so learn from your difficulties and build better goals.

Finally, pay bonuses regularly and on time. Tying bonuses to performance metrics makes a promise that you will reward positive behavior. Don’t screw up the whole system by delaying or going back on your promise.

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