In mid-March 2023, it becomes clear that UBS is acquiring Credit Suisse (CS). During the Federal Council meeting on April 5, 2023, it was decided that all outstanding variable compensations for CS executives would be eliminated or reduced. This decision does not seem obvious to everyone, as a significant number of CS executives are challenging this reduction through legal means. This behavior is not only shocking to us, but also to many others. It is high time, therefore, to reflect on the topic of bonuses in general. It is also a good opportunity to discuss how we at Renuo handle this issue.
Variable compensation programs are not unique to Credit Suisse: In today's corporate landscape, it has become common for companies to offer bonuses. These bonuses are often tied to individual or team goals. At Renuo, we have chosen to forgo such bonuses from the beginning and instead share any potential profits with all employees. This means that 10% of the profits goes to all employees, and 10% is donated to charitable causes. What initially happened for practical reasons – no profit, no bonuses (unfortunately, this does not seem obvious to everyone either...) – has proven to be a very sustainable foundation.
Why individual bonuses are challenging
Defining a bonus is not easy. Given the complex nature of corporate management, it is almost impossible to define bonuses meaningfully: How does one define an incentive? How is it measured? And how can we ensure that the incentive does not suddenly have a negative impact on the team, other goals, or even the entire organization?
It seems essential for all companies to critically examine their bonus structures because they do not unleash the full potential of employees; instead, they restrict it. This applies particularly to leadership positions.
Although the concept of bonuses may initially seem promising and is undoubtedly supported by scientific experiments, significant problems arise from practical application:
1. Bonuses have short-term effects
Bonus systems tend to focus employees on short-term goals that are easily quantifiable. This can lead to neglecting long-term strategic decisions that are crucial for the sustainable growth of the company. Employees might be tempted to maximize short-term gains, even if it leads to suboptimal results in the long run. For example, a bonus for meeting precise time estimates could result in quality aspects being sidelined, only to catch up with us one or two years later.
2. Bonuses promote selfishness
Individually set bonuses create a breeding ground for individualists who prioritize their own goals (or, in this case, the bonus). That is precisely the aim of such bonuses. However, the downside is that collaborative efforts to determine what is most beneficial for the company in times of limited resources are neglected. An incentive model widely used in agencies is based on the time spent on clients. But who would be willing to take care of our shared website or other internal projects like our Learning Week if it harms their personal incentive?
3. Bonuses hinder creativity and risk-taking
When personal interests motivated by bonuses take precedence, the motivation to exercise creativity and take risks beyond the predefined goals decreases. After all, why would individuals invest energy in matters that do not contribute to their personal goals? Our company thrives on daily questioning, reassessment, and adaptation by all of us. Unexpected topics that were not originally part of the bonus structure cannot be adequately considered. Consequently, the incentive for creativity and risk-taking diminishes as individuals focus on achieving their personal goals. In the IT field, it is essential to always keep an eye out for new things. New technologies should be evaluated and tried, even at the risk of finding something uninteresting. Financial incentives distort motivation!
4. Bonuses are disproportionate to personal performance
Assuming we could set a well-defined and ambitious goal: Even if it is achieved, reaching the goal does not necessarily indicate exceptional performance. Success can be attributed to factors that were not directly within the person's control. Conversely, it can be misleading to assume that a person's abilities were inadequate if a goal was not achieved. Therefore, bonuses do not directly reward personal performance but rather focus on the achievement of predefined goals, leading to a discrepancy between performance and reward. For example, who is responsible for ensuring high customer satisfaction? The person who ensures stable operations with good code? The project management team that ensures good support? The administration team that ensures smooth operations? Or perhaps all of them working together in synergy?
5. Bonuses hinder personal development
The previous points can have a negative impact on the personal development of employees: Instead of focusing on their individual strengths and continuing to develop them, employees are motivated to expend their energy on meeting bonus criteria. Inspired by this article, we believe in the analogy of viewing employees as vectors. They should determine their own direction, and it is the responsibility of the company to ensure that the vectors (interests) are aligned.
6. Bonuses hinder agility
Typically, bonuses are set for six or twelve months. In an agile company like ours, which continuously adapts its focus and supports rapid experiments, such fixed timeframes are impractical. Goals can change at any time, and teams may need to be quickly reassigned or restructured. In the past quarter, our goal was to target customer X for our product MugshotBot. However, due to feedback received regarding our website, we shifted the goal to prioritize implementing the feedback first. If the goal had been monetized, the person might not have been willing to make that change, and we could have potentially lost the lead (despite achieving the goal).
7. Bonuses limit ambitions
Individual bonuses implicitly set a limit on employees' performance. The aim is to achieve the goals and strive for an average compromise rather than exceptional performance. Additionally, fixed goals (as opposed to commission-based incentives for sales!) only motivate employees to reach the defined goals, dampening their drive to exceed expectations or address other important matters. In 2021, our goal was to reconsider our employee conversations. It is quite possible that a financial incentive would have hindered the development and improvement we have today in the form of the Growth Atelier.
Our solution: We act as a company.
Given these considerations, we believe that the most practical alternative to individual bonuses is not to introduce them at all. By forgoing individual performance bonuses, we can act as a unified team and prioritize actions that benefit the company as a whole. This approach promotes creativity, encourages risk-taking for the common good, and allows us to pursue ambitious and sustainable goals collaboratively.
If there is a profit at the end of the year, we distribute 10% of it to all employees. The distribution is proportional to their respective salaries. This approach represents a fair approximation of what each person may have contributed to the company's success and is well-supported by the transparent salary model accessible to all. Why exactly 10%? Initially, the share was 20% when the salaries were below the median. Based on the employees' request, we adjusted the salaries to the Swiss median and, in return, reduced the participation from 20% to 10%. The number itself is arbitrary, but corresponds to the concept of tithing, which has been prevalent in many religions and cultures for a long time. Additionally, we donate another 10% to charitable organizations and open source projects. The remaining amount is kept as a reserve within the company and is distributed to the partners last.
I am convinced that our working world would be better if individual bonuses were not distributed. Would this have saved the company mentioned? Probably not directly. However, it would certainly have had an indirect impact on building a sustainable culture. And isn't it ultimately a company's culture that determines its demise?