Over the next few months, I (Immad Akhund, CEO of Mercury) will share my stories, learnings, and tips for other leaders based on what has worked for me. I started my entrepreneurial journey 16 years ago as a recently graduated engineer and have had to learn all the “CEO” lessons the hard way — often feeling like I was making it up as I go. How one leads as a CEO is extremely dependent on any number of factors, like your style, your company, your stage, or your industry. Rather than taking these ideas as ones to copy verbatim, take them as food for thought — one example to learn from amongst the many.
In the last column, I talked about why you shouldn't really think about competitors. This week, I dig into why I'm against bonuses or monetary incentives for employees.
There are three main categories of bonuses, and I think all of them are bad ideas:
- Company-wide bonuses: This is basically that everyone gets a fixed bonus — let’s say 20% — and it's just a thing that the company does (often but not always tied to company performance).
- Performance-based bonus: This is usually something that’s happening on top of a company-wide bonus, so maybe it's 20% for everyone and then another 5% on top of that based on a great review or something like that.
- Role-based bonus: This a bonus that’s tied directly to the nature of a particular employee or team’s function, like a sales bonus, or maybe a project bonus.
The first one, the company-wide bonus, is mostly self-serving to the company — the big benefit being that you can just cut it when things are not as good, like if your profits are low or if there's a downturn in the market. If you work somewhere and your salary is basically variable based on how the company is doing or the markets are doing, it's hard to plan your life around it. I think most people, if you give them a fair comp and you offer them equity, would prefer that to the volatility of a bonus-based comp structure.
Then on the second one — performance-based bonuses — I think they're actually quite dangerous. There’s usually a tendency — and I have this tendency as well — where, if someone gives you a target, you'll try to game it. I think that's just human nature. It encourages people to behave like heroes, or to try to get on big projects or a big launch and then just bail after that spotlight moment. And on the manager side, it creates the risk of recency bias or just any kind of bias. Like, "Oh, I'm friends with this person, they should get a big bonus."
I also think that, instead of aligning people to do the thing that's best for the company or customers, it aligns you to do the thing that's most visible. Basically, if you do a lot of invisible work — like maybe a customer emailed you and you did a bunch of work to fix that issue — you're not necessarily going to get rewarded for that. And maybe your project gets delayed because you took that time to fix the customer's issue so it might even look worse performance-wise, but it was the right thing to do. And these performance-based incentives screw up people's judgment to just do the right thing.
And then with the third — the role-based bonus — you basically get some of those negative aspects I mentioned above plus a bunch more specific to that role. So if we talk about sales bonuses, for example, employees will deal with that inconsistency in pay but then I think the company also deals with a lot of negative consequences like:
- Neglect around smaller customers: If people get a bigger bonus for closing a bigger deal, you end up with less of a care-based system where your team cares as much about the smaller customers as they do the larger ones.
- Weird team dynamics: There are a lot of cross-functional teams involved in making a sale successful. You’ve often got an SDR, an AE, a solutions engineer, the product team that worked on it. If you have that whole stack of people involved but only the account executive makes the sales bonus, it creates a two-tier system and bad blood between the teams.
- Higher probability of customer-product misalignment: When sales teams are incentivized to close deals with bigger customers, they’re often overpromising and underdelivering where those customers aren’t retained because they weren’t actually the right fit for your product.
Another abstract thought on the topic is from the book "Drive: The Surprising Truth About What Motivates Us" by Daniel Pink. He found that external rewards, such as money, can undermine intrinsic motivation, particularly for tasks that people find intrinsically rewarding. Granted, a lot of psychological studies end up being unreproducible so it’s worth taking with a grain of salt, but the results of the study match my personal experience and what I have seen that monetary incentives don’t do a lot to unlock creativity. And that matters if your goal is to build a company where creativity and innovative thinking are encouraged across roles.
A better alternative to a bonus-based structure — regardless of the specific type of bonus we’re talking about — is to just give people fair compensation and ownership through equity. This is how you’re going to build a culture where people actually care about doing great work for the sake of doing great work, not just because there’s some monetary benefit attached to it.
And equity, I think, is just a lot more long-term and people-building. Obviously, there should be things baked into your company structure that rewards high performers and penalizes the lower performers, but I see things like equity grants and promotions as much better motivators of good performance and deterrents of poor performance. They are more about investing in your team and promoting growth, rather than creating these point-in-time rewards that are fleeting.