I worked at a company that instituted a very similar bonus program, it started just after the time the former COO of Ebay joined ... must have been coincidence. Anyways, we had similar formulas, pretty much the same thing. We were eligible for 6% of our salary but it would be paid out in 4 times a year in 2 different ways.
Our bonus was split in two, half would be used for quarterly bonuses, half would be used for yearly bonuses.
Each Quarter you would make personal goals and take on team goals. Each goal which would be measurable and would contribute to your bonus. They would be scored each from 60-120%. Each employee would have a mix of personal and team goals, totally 5 to 8.
Rather than have yearly goals, your average score of all quarters would be applied to the yearly half.
Finally, there was company goals, revenue and profit. If we met "guidance" we got 60% of our calculated goals above and if we hit the 'BHAG' we got 120%.
.....
So, lets say you are pushing a feature and you get it done super early. You your goal, complete on time, well you get 120%!
Of 1 of your 5 goals. It happened to be weighted at 40%, but fixing bugs on time was 30%. You did that ok, no problems, so that's 100% of a 30% goal. And your team didn't get that CFO cost cutting project at all, so that's 60% of that 20% goal. Some finally team sports participation one gave you the remaining at 100%.
Well how much did you earn from that 120% burst of hard work?
Well, its 120% of 40, so 48 points. 30 points for the team and only 12 points for the CFO one. Finally throw in that 10. So... you got 100% of your bonus.
How much was that, well, its 6% of your salary. But really only 1/8th of that 6%, so if you earned 100,000, that was $750!
Wait how did the company do? Well, Rev was lower than expected, so it was 80% of that. so $600.
Profit? No, the revenue drop ate away the profits. So is that 60% of the $600?
No, the bonus pool was funded from profits, so we get nothing. And.. we didn't made a profit in all quarters but one, one that you didn't bust your ass, so you only got $400.
So year end bonus of 6%? All you see if $400, but your math got better.
Sounds like lots of time wasted for coming up with such a complicated scheme, communicating it and everybody thinking through how to maximize their own benefit from it.
Sounds like the articles point. But on steroids.
All it does is keep people from doing actual work and be happy doing so. This is just infighting waiting to happen.
Originally it might boost peoples morale, as they think there is a bonus to be gained. But after people figure it out, there morale drop will probably be a net negative.
It definitely would be a net negative for me, as I would feel screwed.
It's fairly standard, in my experience, and makes sense if you come form the position of the company.
In the budget a certain amount of money is allocated towards the incentive scheme. If the company does not perform as well as planned this pool is reduced appropriately (you can't pay bonuses with money that doesn't exist).
If you take the original pool of money you can express it as a percentage of the entire payroll, and that percentage is what, on average, everyone's bonus will be (for example 6%). Alternatively, that percentage is used to calculate what the pool will be in the first place (before scaling for company performance).
You then have the individual perfomance scaling, which is designed to reward people excelling at their job. The individual has a starting percentage-of-salary bonus, and that percentage is moderated up or down depending on how they performed relative to their peers. Relative to their peers is super important here, because the total bonus pool was worked out based on the starting percentages (and then moderated by company performance) so the final bonuses are really just an allocation of that pool between the employees. In some companies managers will literally take their employees' performance reveiws into a big round-table meeting where they argue why specific team members should receive a 4 or 5 rating (the highest), as there are a limited number of 4s and 5s available in the incentive scheme.
The final calculation is fairly straightforward then.
From the company's perspective, an individual's bonus is = (total payroll) * (incentive scheme budget allocation percentage) * (company performance factor) * ([potentially] business unit or department performance factor) * (individual performance factor)
For the individual it's built up in reverse, and it's the accountants jobs to make sure the numbers match in the end!
bonus = (employee salary) * (base bonus percentage +- individual performance modifier) * (company performance factor) * ([potentially] business unit or department performance factor)
I think it makes sense in practice too, if you accept some incentive scheme. Perhaps no incentive is the best incentive, but I don't know the data on that.
In my experience there was never a huge disconnect between an individual's performance and their expectation of their bonus.
Your starting point was based on your position - say 5% for junior positions and 10% for senior positions.
The thing you had control over was if that starting position went up or down. There are 5 performance review levels, and each has a matching percentage associated with it. A '3' is "doing your job satisfactorily" and gives your base of say 10%. A '4' might be 15%, '5' 20%, '2' 5%, and '1' 0% (I don't remember if they actually went to 0% or not).
The last important factor is the companies overall success, but that is largely out of your hands so it 'is what it is'.
The bigggest downside with this system is that it's not capable of handling everyone getting a '5'. If you really had a team of superstars it would be a hard and long battle to get them all recognised (though I did see that happen on occasion).
a) it was overly complicated and huge individual performances were just washed out in the larger mix
b) It had the appearance of giving a great deal of control to the employees in driving their 'bonus'. However, in the end, the decisions made at the highest levels made the entire process moot. For example, A goal for YoY rev increase of 100%, was a failure when it hit 80%. The hiring and spending required to try and hit that 100% growth target, made profit a 2nd priority.
As a manager, all the personal goals were interesting behavioral levers, but all that was lost when the bonus kept not being paid. "We're tracking all of this for our Goals, which informs our bonus, but our bonus never gets paid because the ceo says its ok we shouldn't be making a profit now cuz we're growing."
I always find it fascinating when employees try to justify these schemes. Both the bonuses and the rating systems.
Yes, all of your team can be 5s. They can all exceed expectations. And that's what each individually thinks too. He's gonna be so much better than everyone's else. Most people think that.
Of course the system is rigged. It's not really about exceeding your expectations. Even when they try to make it seem like it's possible. It's about making a nice bell curve of the ratings and assigning bonuses and salary increases based on it. If you're at the wrong company they also fire the bottom 10% or something like that.
Why they do this I will never understand. It kills intrinsic motivation (even for the 'exceeding' guys as seen in previous comments). Google the Oprah experiment. It kills morale if the company doesn't make it one time. It kills morale for the guys that don't get the bonus they wanted or makes them game the system. Which kills morale for the guys that are actually good at their job but don't care about gaming the system. So much to loose.
Our bonus was split in two, half would be used for quarterly bonuses, half would be used for yearly bonuses.
Each Quarter you would make personal goals and take on team goals. Each goal which would be measurable and would contribute to your bonus. They would be scored each from 60-120%. Each employee would have a mix of personal and team goals, totally 5 to 8.
Rather than have yearly goals, your average score of all quarters would be applied to the yearly half.
Finally, there was company goals, revenue and profit. If we met "guidance" we got 60% of our calculated goals above and if we hit the 'BHAG' we got 120%.
.....
So, lets say you are pushing a feature and you get it done super early. You your goal, complete on time, well you get 120%!
Of 1 of your 5 goals. It happened to be weighted at 40%, but fixing bugs on time was 30%. You did that ok, no problems, so that's 100% of a 30% goal. And your team didn't get that CFO cost cutting project at all, so that's 60% of that 20% goal. Some finally team sports participation one gave you the remaining at 100%.
Well how much did you earn from that 120% burst of hard work? Well, its 120% of 40, so 48 points. 30 points for the team and only 12 points for the CFO one. Finally throw in that 10. So... you got 100% of your bonus.
How much was that, well, its 6% of your salary. But really only 1/8th of that 6%, so if you earned 100,000, that was $750!
Wait how did the company do? Well, Rev was lower than expected, so it was 80% of that. so $600.
Profit? No, the revenue drop ate away the profits. So is that 60% of the $600?
No, the bonus pool was funded from profits, so we get nothing. And.. we didn't made a profit in all quarters but one, one that you didn't bust your ass, so you only got $400.
So year end bonus of 6%? All you see if $400, but your math got better.