Merit Money — Bonus System Done Right

Many companies have some form of annual bonuses, calculated via crazy formulas, where even your sock color can matter. Or/and, they do multiple rounds of different evaluations, including individual and 360 degree reviews, that influence reward. The final calculations, and even feedback provided by peers are transparent for managers only. So, there is no surprise that such systems considered unfair by employees and this ultimately leads to loss of trust to managers. How can we change this?

I once worked in a company that evaluated performance, and therefore annual bonus, based on top-down goals achievement and “weighting” or “calibrating” people against each other at all levels. I can hardly imagine more unfair system. For example, lets say two same level manager are weighted 25% to 75% to each other. That means subordinates of 25% weighted manager will get four times less bonus, doesn’t matter their performance. And this is still happening in many organisations.

Merit Money is Management 3.0 practice that might help solve this.

Implementation goes through 3 steps:

  • create safe-to-fail environment
  • create virtual currency
  • decide which organisational units can collectively receive virtual currency

…and next is how we’ve done this practically.

Create safe-to-fail environment. We know that there is a budget for annual bonus for our organisation, and we can either use it all for this new system or use some percentage, dependent on how the system will work for us. So, we can start experimenting with one team only and limit budget to 5% of overall bonus for example.

Create virtual currency. We using thing, we call “Merit Candies”. They exist only in a spreadsheet — so they are very virtual. Important thing here is that whatever “currency” you choose ( hugs, kudos etc ) it should clearly communicate no connection with real money.

Decide which organisational units can collectively receive virtual currency. In our case it’s a one Scrum team, that makes recognition relatively easy. Team members know each other for quite a long period and have a good sense of contribution of individuals.

Each sprint, each team member receives 10 candies that she can distribute among others in team, excluding her.

The single most crucial aspect of a merit system is that every individual can only recognize the contributions of other people, and that the opinions of all individuals have equal weight.
Appelo, Managing for Happiness

We do candies distribution exercise as closing part of Sprint Review meeting or as opening of Retrospective sometimes. I believe there is no need for dedicated meeting, cause it takes up to 10 mins normally. And we do this each 2 weeks. I ask team to provide the “why?” together with candies, so it’s also a regular peer feedback session.

Here is how it might look in spreadsheet.

As you see, we got total amount for each team member and percentage distribution, and this gives options upon monetising. We can either distribute bonus budget by percentage or, for example, pay 70$, 79$ etc.

Finally, 6 rules to keep in mind for rewards:

  • Dont promise reward in advance
  • Keep anticipated rewards small
  • Reward continuously, not once
  • Reward publicly, not privately
  • Reward behaviour, not outcome
  • Reward peers, not subordinates

How are you improving your organisation bonus system ?

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Originally published at www.andriipavliukov.com on August 22, 2016.

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