It's Time to Reconsider Cash Bonuses in Startups | Mark MacLeod

February 15, 2023 - Mark MacLeod

Is it Time to Reconsider Cash Bonuses in Startups?

I have long had mixed feelings about cash bonuses in startups. When I use the term “startup” I am not just referring to the super early stage. But really that stage of growth, including scaling, when companies are burning money chasing outlier outcomes.

Do Startups Give Bonuses? Rethinking Incentives

Here are my issues with bonuses:

Staff just expect them. The discussions around the exec table is often about how to give some without disappointment. This is the exact opposite intention. They are meant to reward extraordinary performance. It should feel great to get a bonus. Instead, they are expected and staff (at all levels) really just think of bonuses as part of their salary.

Bonuses are based on forecasts. As someone who has created more than his fair share of startup forecasts over the decades, I can confirm that most forecasts are really fraudcasts. We just don’t know. We create assumptions on top of assumptions. In good faith. But in reality, we don’t know what is possible.

Do Cash Bonuses for Employees Actually Motivate?

My concern with bonuses as they relate to forecasts is that they create a fixed mindset. Management expects that we will achieve this (largely fictional) forecast. Staff expect to be paid based on it.

This can de-motivate when targets are missed (which is most often the case). Ironically, it can also cause people to play it safe and maximize their bonus by hitting the targets without shooting for the moon and taking on more risk chasing an even bigger result.

While bonuses can appear at all staff levels, the biggest bonuses are reserved for leadership. Going back to the purpose of bonuses (to reward extraordinary performance), if you are a leader in a startup, you are expected to perform extraordinarily all the time. ie. extraordinary performance is in fact ordinary! Your incentive/ upside is really in the form of stock options.

Stock Options for Employees: A Sustainable Alternative?

A far simpler approach would be to just pay strong, competitive salaries and have all additional incentives be in the form of stock.

Look inside your company. Do you pay cash bonuses? If so:

Are they having the intended impact?

Are they driving extraordinary performance? Performance over and above what you expect from the role?

Do the targets that your bonuses are based on represent extraordinary performance?

If not, maybe get rid of them. Now is the perfect time as we are in a period of cost-cutting. Pay great salaries and demand great performance. That’s it.

Photo by Alexander Mils on Unsplash

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