Bonuses are dumb.
DoorDash never had them, and neither should you.
I bribe my children. All the time.
They clear their plates? Bribe. They brush their teeth? Bribe. They remember to dredge the moat I dug in front of my house? Bribe, bribe, bribe.
Why do I do this? Results of course. Results. I can give them each clear, individual tasks that they don’t want to do, and the bribe makes them do them. Again and again and again. It’s A+ parenting1.
Your employees and my children are, however, fortunately not the same. No, employees are not transactional automatons for whom every task has a price. They are in fact wonderfully complex snowflakes that require a delicate balance of incentives, inspiration, and intrinsic motivation to do the thing that you want.
It is for that reason that DoorDash never had bonuses. Because bonuses, dear reader, are stupid.
The story of the bonus.
Here’s how bonuses, especially in startups and growth companies, go. You’re in the interview process and a recruiter tells you that “the compensation for this role is [a number that does not excite you] but don’t worry, there’s a bonus program that gets you to [a number that excites you more].” So upon reflection, you conclude “well, it’ll be fine, I’ll get my bonus, and that’ll make this job doable.”
Then you start. What comes next is headache after headache. What’s your bonus target for the year going to be? How much is individual? How much team? How much is company? And wtf, I just started, I don’t even know where the bathroom is, let alone how to start moving my number?
Fast forward, the end of year comes, and for reasons that are unclear to you, you end up getting paid 65% of your bonus target. It’s less than the 100% you expected - you hauled ass all year - so you rage quit, and move to a maple syrup farm in Quebec.
And so ends the story of the bonus.
Which gets at three truths about bonus programs:
They don’t achieve any greater performance.
They distract your team from executing.
They ultimately only make people mad.
Bonuses don’t work.
The typical rationale for a bonus program is this: I want to motivate my team at all levels to put in 110% effort to achieve truly extraordinary results for the company.
This makes a fundamental mistake about top talent, which is that they’re motivated in the most cynical way possible by money.
Think about it; whenever a founder talks about the profiles of their “A Players” is one of the categories ever “loves money?” Of course not. It’s ‘people who want to win’, ‘people who are mission-driven’, and ‘people who have a chip on their shoulder’, just to name a few. Why would you design a compensation philosophy for this group of people with such a transactional reward?
Now this is not to say that we’re all out here building vertical SaaS for the love of the game. On the contrary, the backbone of the entire tech industry is equity compensation. But that’s a financial incentive that objectively aligns your team to building a valuable, enduring business, rather than just motivating its individual teammates to click buttons and whack moles to get their annual bonus.
After all, given that most founders rightly say that they want “missionaries, not mercenaries,” why would you pay the former like they’re the latter?
Bonuses are a distraction.
Very simply, you, growth company CEO, want people who are going to leave it all on the field to hit your ambitious, if not completely insane annual goals. It’s arguably what this whole industry is based on.
In that world, why on Earth would you build a compensation plan that incentivizes those same people to massively hedge such that they maximize their likelihood of achieving 100% of a lower, less aggressive objective? You’re basically telling your team, “hey, if you don’t shrink your goal enough, I’ll take back ~30% of your paycheck.” Does that sound smart?
And that ignores the simple fact that, outside of your company’s sellers, it’s very hard to establish what success looks like for a whole bunch of roles. What’s the annual bonus trigger for a L4 engineer? A recruiting manager? An operations associate? You’re going to set, track, and score an objective measure of performance for every employee? What a total $%#!ing mess. You will spend more time on setting your team’s goals than they will in actually executing against hitting them.
Crying out loud.
Bonuses only make people mad.
If you’ve been to business school - not a cool thing to admit these days - you’ve probably done the HBS case study on Lincoln Electric.
And the short version of that case is this2. In year 1, because the company had done well, Lincoln surprised its employees each with a turkey at Thanksgiving. This made their employees happy. In year 2, their employees queued up at Thanksgiving to collect their now-expected turkey. It didn’t make them any happier. In year 3, the company had not done so well, so no one got turkeys. And that made Lincoln Electric’s employees pissed.
As they say, as goes turkeys, so goes bonuses.
Because employees expect their bonuses - sorry, they $%^#ing do - the best you can ever achieve with a bonus is not making your team unhappy.
What kind of bullshit compensation is that? Spend millions of dollars just to avoid angering your team?
“But Steve, how do I reward top performers and motivate middle and lower performers?” I can hear you saying.
“Doug,” I hear myself saying back, “You’re the CEO, you already have the power to give people raises and promotions, as well as fire people. You have all the tools you’ll ever need. Not to mention more equity grants!”
Oh and another thing.
Especially if you’re a growth company, don’t be cutting your team checks that can go to growing your business! Your team is in-seat because they believe in the long-term value of your equity, so why would you take your scarcest resource, cash, that could be CAC or promotions or brand marketing or whatever, and then pay it out to your team as effectively a dividend? That team is looking back at you saying “take this back, and go get more customers!”
In conclusion and in summary.
Don’t have bonuses. Pay people a salary where they don’t have to worry about their salary, build a high-performance culture that celebrates hitting big numbers, and then, once you IPO, buy everyone a couple of wild tigers. Just like Mike Tyson.
The end.
I said good day.
It’s not.
This might be a completely wrong recollection of the case, but honestly, what’s a more MBA move than telling a totally fictional story with maximum confidence.
Very nice article. A question that came up while reading, was.
We agree that bonuses suck. And equity is better because all internal-yearly bonus targets are translated to the "ultimate KPI of success", company value. Missionary over Mercenary.
But, trying to move the discussion forward, what about the common problems of these two? How you decide who gets equity and how much of it? How you decide that Lukas takes 1, Mary 100 and Tom nothing. And how do you communicate that before the fact, as something that a team member can achieve?