Performance Bonuses
A-players are the biggest contributors to company success, and they should be rewarded exponentially
Performance bonuses are calculated to account for individual and team or company performance with the weights shifting as seniority increases
The performance team runs the bonus process, including the quality control of KPIs; adjustments can be sometimes made by business leaders to better reflect team performance or individual conduct
Equity bonuses with quick vesting periods are preferred, since they are "closer to cash"; equity instruments used can vary over time so having an expert in-house is key as you scale
Using bonuses to reward top talent exponentially
Performance bonuses should incorporate individual and team/company performance
Bonus potential
based on benchmarking
Bonus Multiplier
Period adjustment
pro-rated for time in role
Bonus
as a % of salary
Bonuses are the best way by far to incentivise performance. They allow to exponentially reward top talent - A-players have an outsized impact on the company and so they should receive an outsized bonus. In parallel, they can incorporate team or company KPIs as a way to “rally employees around the flag”.
Bonuses are a result of the multiplication of three factors:
- Bonus potential - the benchmark bonus for the role, which can be either fixed based on the employee’s contract (e.g. 30% of base salary) or based on the benchmarked compensation of the role
- Bonus multiplier - a multiplier that scales the bonus based on a mix of individual and team or company performance that varies with seniority
- Period adjustment - a % adjustment in case an employee has joined before the start of the performance period
The bonus multiplier
Bonus multiplier
Individual performance
% weight
variable
Team / company performance
% weight
variable
The bonus multiplier is what makes compensation flexible depending on performance. The calculation is a weighted average of two factors, combining individual and group performance.
The individual performance multiplier is based on the grade received during performance reviews and it exponentially increases with better performance.
Individual performance multiplier
3.0x - 5.0x
0.5x - 1.5x
0.0x
The team or company performance multiplier should based on the main team or company KPIs (e.g. a KPI for the Onboarding team could be "reducing the onboarding time from 1 month to 1 week" or for the Marketing team would be to "acquire 10k new users via marketing initiatives") and adjusted for the achievement percentage of the KPI. See below the example conversion for a team KPI.
Team / Company Performance Multiplier
KPI Achievement level (%)
The performance multipliers are averaged using weights that vary based on seniority, with team performance gradually increasing in importance.
Multiplier weights
Calculator
Try it - estimate a bonus
20% × (1.75x × 65% + 0.85x × 35%) × 11/12
Bonus: 26.3% of annual salary
An end-to-end example
Alice is a Senior engineer in the Credit Cards team. She joined in February and is looking forward to her bonus award at the end of the year. Let’s see what she’ll receive this year...
Individual Performance Multiplier
The key input to calculate the multiplier is Alice’s performance reviews in the last 4 quarters. Averaging out the multipliers for each quarter we obtain an individual performance multiplier of 1.75x.
Individual performance multiplier (Average)
(0.5 + 0.5 + 3.0 + 3.0) ÷ 4 =1.75x
Team Performance Multiplier
The key input to calculate the multiplier is her team’s KPIs – the Credit Cards team. This team had two main KPIs over the course of the year credit card revenue and default rates, with the latter having a lower weight in the calculation.
Credit card revenue
Default rates
Average Team KPI achievement rate
65% × 0.75 + 100% × 0.25 =73.75%
Team performance multiplier
0.5 + (73.75 − 60) ÷ 40 =0.84x
Final Calculation
Since Alice is a Senior, her individual performance accounts for 65% in the final calculation. The weighted average of her performance multipliers is therefore 1.43x.
Individual Performance
Team Performance
Bonus multiplier
1.75x × 65% + 0.84x × 35% =1.43x
- Her bonus potential, determined through compensation benchmarks is 20%
- Her stub period adjustment is 11/12 = 92%, since she joined in February, while the performance period started in January
Therefore her bonus as a percentage of salary is calculated as follows:
Bonus as % of salary = 20% × 1.43x × 92% → 26.3% of annual salary
Bonus award process
The performance team runs the bonus process once a year
Quality control checks
both manually and automatically for Team and Company KPIs
Bonus calculation
using average performance over the last four quarters
Small adjustments by business leaders
to better reflect team performance or employee conduct
Announcement of bonuses
typically paid out a few months later in the form of equity
Bonuses are calculated and awarded once per year - twice-yearly bonuses can create unnecessary pressure on management and the performance team.
To calculate and award bonuses, the performance team follows the below process:
- KPI quality control - automated and manual checks are carried through for the performance KPIs used, as these are a key input to the bonus calculation
- Calculations - bonuses are calculated based on the bonus potential, bonus multiplier and period adjustment with results averaged from the previous four quarters
- Calibrations - bonuses are initially communicated to top management (C-level or Heads of Departments for larger organisations) who can
- Ask for small additions/deductions to the bonus pool for certain teams if they do not believe KPIs accurately account for exceptional achievements/ underperformance
- Single out employees who may not deserve a bonus for conduct reasons
- Announcement & Award - bonuses are announced in USD and usually awarded in the form of equity a few months later
Cash vs Equity bonuses
Equity bonuses are optimal for scale-ups, but cash can be offered as well
- Do:Quick vesting periods
- Do:Variety of equity instruments
- Do:Optimising for tax efficiency for employees
- Do:On top of equity, to promote retention
- Do:Variable share of comp for those with quotas
Awarding bonuses in the form of equity can be optimal for a scale-up; it is a good way to align employee incentives with the company while preserving cash. A few things should be taken into account for equity bonuses:
- Quick vesting periods make bonuses “closer to cash” - we suggest offering bonuses 50% already vested, with the remainder vesting over 2 years (vs the traditional 4-year vesting for sign-on bonuses), which:
- Helps close the competitive gap with established companies that pay bonuses in cash and
- Satisfies employees' need for a tangible reward for the work they have done over the past year
- There is no silver bullet equity instrument - the best equity instrument will depend on your size, growth, the location of your workforce and regulatory conditions, all of which can change quickly
- Maximise tax efficiency for employees - you should be solving for tax efficiency with your equity scheme and communicating this to employees to maximise engagement
- Hire a shares compensation expert (when you get the scale) - a mid to senior profile for an in-house expert can help introduce new equity schemes, manage employee requests and avoid compliance violations
% of performance bonus vested
At reward time: 50%; + 1 Year: 75%; + 2 Years: 100%
In parallel, cash bonuses are a good way to award employees who are:
- Consistently A-players, as it can help with retention, acting as a stronger motivator. These cash bonuses should be offered on top of and in smaller amounts than equity (measured in weeks, rather than months, of salary)
- Quota carriers (such as Salespeople, Recruiters, Customer Support Agents, etc.), who normally receive low base salaries and whose quota-based bonuses are a key component of take-home pay