David Cummings on Startups

What do National Lampoon’s Christmas Vacation and Netflix have in common about annual bonuses?

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David Cummings

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With the ring of a doorbell on Christmas Eve, Clark Griswold (played by Chevy Chase) eagerly rushes to the door in anticipation of his annual company bonus check. Only, after opening the envelope, he quickly reads that there’s no bonus, and, instead he’s receiving an annual supply of jelly. Yes, jelly. Then, to the 10+ family members gathered around, he announces that he’s received a Christmas bonus for 17 straight years and is devastated to not have one.

This scene from National Lampoon’s Christmas Vacation captures the number one problem with annual corporate bonuses: people view the bonus as part of their standard compensation and don’t see it as a bonus. If you take away the bonus, it seriously hurts morale. If the bonus is given out, people don’t think anything of it. If you make the bonus tied to individual performance, people naturally game the system to their best interests. If you tie the bonus to company performance, people don’t feel they have much control over it.

Harvard Business Review has an article in their most recent issue titled How Netflix Reinvented HR where the author, Patty McCord, former head of HR at Netflix, talks about corporate bonuses. McCord writes:

During my tenure Netflix didn’t pay performance bonuses, because we believed that they’re unnecessary if you hire the right people. If your employees are fully formed adults who put the company first, an annual bonus won’t make them work harder or smarter.

McCord nails it perfectly. Bonuses don’t do what they’re intended to do and are perpetuated because that’s how it’s always been done.

What’s the solution if you do away with annual bonuses? Pay competitive, market-rate salaries as short-term compensation and include equity or stock options as long-term compensation.

What else? What are your thoughts on the idea that companies shouldn’t do annual bonuses?

Comments

3 responses to “What do National Lampoon’s Christmas Vacation and Netflix have in common about annual bonuses?”

  1. raybelec Avatar
    raybelec

    I work for a company that pays a quarterly bonus and a yearly enhancement. The quarterly is geared to production and the yearly to company profits. A lot of people believe the system is rigged. I watched for five years my speed and efficiency increase but no net benifit to my own bottom line. I received two yearly pay raises of over a dollar an hour but my taxable income stayed at fifty thousand. This was because as my hourly wage increased my production bonus decreased.
    I tracked my productivity increased to 5% a year. But my income didn’t. Over the past two years my income increased 33%. That only happened because I told them is was shopping for better pay.
    I purchased some machines and opened a prototype development lab. My employers noticed I wasn’t a trapped animal and I could get food anywhere I want and only then did they start feeding me better. I my opinion a bonus system doesn’t retain talent. I believe it repells talent. My shop provides me with plenty of income but my employer provides me with challenging work and tight deadlines. That is what drives me and many others like me.

    Reply
  2. Dave Will Avatar
    Dave Will

    David,

    I enjoy reading your blog and keeping up with the ATV. Love your mission and love that Johnson’s so involved in it. Curious about this post, though. What is the problem you’re trying to solve by taking away annual bonus’s and replacing it with higher salary? Seems you lose a few things but I’m not sure what you gain. You would lose any acknowledgment at the employee level that profit matters and you would replace it with a 1 time 5% increase (or so) in compensation. I don’t think people at my company would value that as much as a nice check at the end of the year related to our company’s success. Also, more tenured employees here get more, so it’s a reward for longevity in the business…

    Thoughts? Why take away an annual bonus in return for slightly higher comp?

    Thanks,

    Dave

    Reply
    1. David Cummings Avatar
      David Cummings

      Thanks Dave. I appreciate the kind note about ATV.

      Per an annual bonus instead of slightly higher comp, a few questions:
      1. Do employees expect the bonus?
      2. How much influence do they have over receiving the bonus?
      3. If they don’t receive the bonus, how will they feel?
      4. If they do receive the bonus, how will they feel?

      Reply

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