Historically, many leaders choose not to disclose the details of their bonus plan. We can all understand the desire not to make a commitment we might not be able to fulfill. It is less risky to wait until the end of the year and then base the decision on how good of a year it was. That's often how firms end up with a plan based on discretionary results. You might want to ask yourself if you know what you must do to earn more in the current year and how that influences your effort.
But what these leaders miss by keeping their bonus plans opaque is the chance to motivate your team in the same way they are motivated by letting them know exactly what goals they're shooting for and how to win a bonus.
Tapping the Motivational Power
Consider a pop culture reference from one of the most popular holiday movies: Christmas Vacation, starring Chevy Chase as Clark Griswold (I watch it every year). A big theme in the movie is how Clark dreams of using his year-end bonus to buy his family a pool. Only, in the end, all he gets is a subscription to a jelly-of-the-month club. Clark is furious, especially because he doesn't understand why he didn't get his bonus. After all, he thought he had a great year and would be justly rewarded.
How motivated do you think an employee like that will be going forward?
What we need to understand is how we as leaders can use a transparent bonus program to help motivate employees to perform. The roots of this date back to 1964 with Victor Vroom's "Expectancy Theory of Motivation," which basically states that the intensity of effort is dependent on the probability of getting the expected outcome and the size of the prize.
Putting it another way, if we don't tell people how they can earn their bonus, then we can't expect to motivate them to achieve those results. That's when people are simply left to hope for manna from heaven or that their benevolent leader will take care of them somehow, because they just don't know how they can earn their rewards. If you don't share the details, you're probably leaving productivity gains on the table.
To get the full value of the disclosure, how to earn a bonus is important because people can assess the probability of getting into bonus territory. You should also disclose the size of the potential bonus so they understand what the reward will be if they do achieve. It's the combination of a decent probability and a good reward that drives their effort. We have all been in a situation where the goals were so impossible it was demotivating or had a bonus so small it really wasn't worth the extra effort.
A Cautionary Tale -- Malicious Compliance
But I also need to share a word of caution: If you pay for something, you will get it. So, beware of unintended consequences in terms of what goals you set your bonus on.
The classic example is when you pay a bonus to a sales team on the basis of revenue objectives without any regard to profit or margin. If the sales team also has price control, you might be setting yourself up for a loss. The issue is that the sales team is motivated to close the sale, so they could potentially lower the price to meet that goal, even if the deal ends up losing money for the company. You had a plan that rewarded revenue with no consideration for profit, so you got what you paid for.
Unlock the Upside
There is real power in opening your bonus plan for your team. The better they understand what they need to do to earn it, the more likely they are to reach their full upside by increasing their performance to earn that bonus. Just keep in mind that you need to be careful what you pay for when you embrace transparency this way, because you'll get what you ask for. If you feel the need to give out subscriptions to jelly-of-the-month club, toss a bonus check in the envelope too.