simple quarterly bonus calculator

example spreadsheet implementation

design goals and constraints

• individuals set their own goals. individuals often know best what they are capable of. management may encourage or suggest goals but cannot force a specific goal. they can only communicate their opinion of a goal's value to the team/business.
• individuals understand how much management values their goals. they must know this immediately after setting goals so that they have opportunity to revise their goals or find an environment more appropriate to their skills or motivations.
• peers evaluate performance / completion of goals. this promotes regular dialogue between each contributor and at least two peers. peers are also often better suited to evaluating completion of specific deliverables than management.
• achievement of goals results in reward proportional to the level of achievement.
• performance is evaluated and rewarded quarterly to encourage frequent goal setting and evaluation and to correct or mitigate poor performance before it is allowed to negatively affect overall productivity.

the following design can easily be adapted to the financial health of the business, by setting an appropriate value for pool cap. if total annual payroll for the business is $1 million, and the business can safely finance total annual bonuses of $250k, pool cap should be set at 25% (0.25). if everyone achieves their individual goals and the whole team completes the team objectives in all four quarters, the business spending on bonuses will not exceed $250k.

higher pool cap settings, will result in increased motivation and productivity.

lower pool cap settings, will result in decreased motivation and productivity.

settings

• pool cap (c, spreadsheet B16): represents the percentage (of salary) expressed as a decimal between 0 and 1 that won't be exceeded. suggested value is between 0.2 (20%) and 0.4 (40%)
• team alloc (aT, spreadsheet B17) represents the percentage (of bonus) expressed as a decimal between 0 and 1 that makes up the portion of the bonus determined by team performance. suggested value is between 0.1 (10%) and 0.5 (50%)
• individual alloc (aI, spreadsheet B18) represents the percentage (of bonus) expressed as a decimal between 0 and 1 that makes up the portion of the bonus determined by individual performance. value is calculated as: 1 - aT

performance

individual performance in cells D4:D7 represents the percentage expressed as a decimal between 0 and 1 of individual quarterly goals achieved multiplied by the value (0 - 1) of those goals to the team.

team performance in cell D17 represents the percentage expressed as a decimal between 0 and 1 of team quarterly goals achieved. if team goals were not set, this should have a value of 1.

values for either individual or team performance may exceptioonally be higher than 1 (ie: 1.1 or even 2.0) if a goal is deemed especially valuable to the business or exceptionally difficult to achieve and if the business financial health can support it.

calculating performance

individual performance (pI)

• goal (g): an individual sets their own goals for the quarter. they should set 3 goals (g1, g2, g3).
• evaluation (e): the individual nominates 2 peers to evaluate goal completion at the end of the quarter. if peer one evaluates goal one (g1) as 100% complete and peer 2 evaluates g1 as 50% complete, g1 is deemed to be completed (e1) to the average of the two evaluations, ie e1 is 75%.
• value (v): a manager assigns a value to the team for each individual goal. if g1 is without merit, value one (v1) may be set to 0.1. this way, if it is 100% achieved, it still evaluates to 10% indvidiual performance. this should motivate individuals to set meaningful goals. goal values must be communicated at the start of the quarter to allow individuals the option to revise low value goals if they believe they can identify and achieve a higher value goal. management can reward exemplary performance on a difficult task by associating a value higher than 1 (ie: 1.1 or even 2.0) for a given exemplary goal.

$$pI=\frac{(g1\times e1\times v1)+(g2\times e2\times v2)+(g3\times e3\times v3)}{3}$$

team performance (pT)

• management sets several broad team milestones for the quarter. ie:
  • release feature x to the public
  • get 80% of staff to 90% completion of training course y
  • successful audit of product z by third party
• management evaluates completion of each goal at the end of the quarter and sets pT to the average of the completion state for all goals

formula

• b: total bonus for the quarter
• s: annual salary
• c: pool cap

team

• bT: team bonus
• aT: team allocation
• pT: team performance

individual

• bI: individual bonus
• aI: individual allocation
• pI: individual performance

$$b=bT+bI=\frac{s\times c\times aT\times pT}{4}+\frac{s\times c\times aI\times pI}{4}$$

examples

alice

alice and her team achieve all of their goals

• alice's annual salary is 100k
• pool cap (total potential bonus) is 30% (0.3)
• team
  • alloc is 40% (0.4)
  • perf is 100% (1), because team goals were 100% completed in the quarter
• individual
  • alloc is 60% (0.6)
  • perf is 100% (1), because individual goals were 100% completed in the quarter

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$$7500=3000+4500=\frac{100000\times 0.3\times 0.4\times 1}{4}+\frac{100000\times 0.3\times 0.6\times 1}{4}$$

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bob

bob's team achieves two thirds of their goals, bob achieves most of his individual goals with a tiny bit running into the following quarter

• bob's annual salary is 100k
• pool cap (total potential bonus) is 30% (0.3)
• team
  • alloc is 40% (0.4)
  • perf is 70% (0.7), because team goals were 70% completed in the quarter
• individual
  • alloc is 60% (0.6)
  • perf is 90% (0.9), because individual goals were 90% completed in the quarter

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$$6150=2100+4050=\frac{100000\times 0.3\times 0.4\times 0.7}{4}+\frac{100000\times 0.3\times 0.6\times 0.9}{4}$$

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