Performance Bonuses

Using bonuses to reward top talent exponentially

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:

• 01

  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

• 02

  Bonus multiplier - a multiplier that scales the bonus based on a mix of individual and team or company performance that varies with seniority

• 03

  Period adjustment - a % adjustment in case an employee has joined before the start of the performance period

The bonus multiplier

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.

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.

The performance multipliers are averaged using weights that vary based on seniority, with team performance gradually increasing in importance.

Bonus award process

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:

1. 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

2. Calculations - bonuses are calculated based on the bonus potential, bonus multiplier and period adjustment with results averaged from the previous four quarters

3. 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

4. Announcement & Award - bonuses are announced in USD and usually awarded in the form of equity a few months later

Cash vs Equity bonuses

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:

1. 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

2. 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

3. Maximise tax efficiency for employees - you should be solving for tax efficiency with your equity scheme and communicating this to employees to maximise engagement

4. 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

In parallel, cash bonuses are a good way to award employees who are:

1. 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)

2. 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