Recently one of our Apprentice companies asked their Mentors a question on compensation structure, specifically comparing the benefits and challenges of bonuses versus profit sharing. This question was asked in a Mentor Team Meeting, which we run like an advisory board, and is attended by the Mentors matched with the company based on their needs upon enrolling in the program.
Each Mentor had different shared experiences and lessons learned with respect to bonuses and profit sharing (as usual in a Junto session, advice-giving was not allowed). The breadth of their stories led me to six key takeaways and standards when crafting compensation plans that have bonuses and/or profit sharing as a component.
The Mentors asked if the company’s purpose for creating the plan was more about reward or retention. In their experiences, offering bonuses was a method of reward, whereas profit sharing was more about retention and alignment with the company. Across the board, all Mentors agreed that knowing the “why” for establishing the new structure in the first place was paramount to creating the right one.
SIMPLICITY IS KEY
From their experiences, as a company tried to tie compensation to measurable results, it was easy for a plan to become increasingly complex. The mentors agreed that aligning compensation to results is important, yet several of their lessons learned with keeping a plan simple came from experiences of taking the metrics-driven plans too far. They shared stories about getting to the point where an employee couldn’t calculate his/her own compensation without help.
For the best of both worlds, they realized they had to balance simplicity with metrics-driven plans. “My guideline is to keep it simple, objective and fair,” one Mentor shared.
EXPECTATIONS MUST BE MANAGED
Several stories highlighted a creeping sense of bonus "entitlement" once the practice was introduced. Some Mentors shifted to a profit sharing model as a result, which was not perceived as “a given” by their teams. Others changed the expectation by creating more autonomy with how the bonus was earned, tying them to specific metrics the employees set for themselves.
These metrics were set during a meeting with the leader, and the employee knew the metrics needed to tie back to company priorities and stay within cultural norms. The Mentor shared that in this case team members were prone to set more aggressive goals than he would have set for them. They all knew what results they had to achieve to receive their bonuses and felt more in control of receiving or not receiving it, rather than simply expecting it.
LUMP SUM PAYMENTS AREN'T THE ONLY OPTION
One Mentor shared that he appreciated profit sharing not only as a way to align team members with the company’s success but also as a retention tool by having their share paid out over time. In that Mentor’s case, the profit sharing earned for a year was paid out in three installments to avoid the potential of employees resigning immediately after receiving a one-time payment.
CLEAR COMMUNICATION IS VITAL
All Mentors underscored the importance of clear communication around compensation plans. Some of the biggest challenges they faced with demotivated team members or misaligned compensation plans stemmed from ambiguous communication. One Mentor hammered home that no matter what compensation method is chosen it is important that “standards are transparent and easy to understand.” All agreed that this is one area of business that is simple but not easy, and that a focus on clarity avoids ambiguity.
PROGRESS OVER PERFECTION
A final theme that came out from this Mentor Team meeting was that compensation plans are always evolving. No Mentor believed that their plan or method was just right, rather several had accepted that this area will always be changing to meet the needs of their businesses and that a “perfect” compensation structure simply does not exist.