Dear Sean,

My business partner and I have three designers working for us, as well as two additional office staff. At this size, should we be giving bonuses to our team? And if so, how often—quarterly, annual? And then, based on sales?

—Nancy Evars, Evars + Anderson Interior Design

Dear Nancy,

Figuring out the best way to give bonuses is actually a three-part equation. Bonuses represent an overall acknowledgement of a job well done, reminiscent of the tipping economy. They also demonstrate the success (and therefore security) of the firm. Finally, bonuses indicate status—who gets the most and why is telling. Let’s break each of these apart for you to decide whether giving bonuses is right for you and your firm.

Before we do though, I should note that I am not a fan of irrational bonuses, which are fraught with judgment and innuendo rather than a conversation about the metrics of success established by you and met (or, hopefully, exceeded) by your employee. Here’s an example of the former: “You did a great job, Jane, so here is $5,000 as your bonus for the year.” And here’s the approach I prefer: “This is the bar I set, you went this far beyond it, and are therefore entitled to $5,000. Well done!”

Why does the difference matter? In The Power of Moments (2017), Dan and Chip Heath write about acknowledgement as a key determinant of the employee satisfaction. Specifically, they say that it is not just financial compensation that determines whether or not an employee feels good about their workplace, but also the owner’s ability to see and acknowledge the contributions that employee has made. This acknowledgement, or feedback, should be ongoing—occurring much more often than quarterly (or, worse, annually). And if feedback is ongoing, a bonus, whenever it is paid, would serve as a crescendo moment to an overall and continuous recognition to a job well done. Again, I prefer tangible illustrations of value: “Wow, Jane, you brought the Harris job in a month early and the clients were thrilled with your project management. That efficiency increased our profit on the project by 15 percent. We want to give you half of that increase; here is $5,000.” Structured that way, the bonus comes with specific metrics of success and a defined value generated by the employee, culminating in the employee’s share of that value as recognition of the job well done.

Using bonuses as a way of ranking people is a practice that should never happen, but almost always does.

If you want to give a bonus to show that the firm is doing well and that employees should feel safe and secure in the future, terrific. However, study after study has shown that the return on this investment (by way of employee retention and satisfaction) is less than that of the investment in the other areas of the workplace. Whether that is having in-house amenities or paying for company retreat(s)—spa day, anyone?—the investment in the overall well-being of the firm through extra investment is far better than just writing an employee a check.

Lastly, using bonuses as a way of ranking people is a practice that should never happen, but almost always does. In a small firm like yours, everybody is eventually going to find out what everyone else got. Giving more to one employee because you like them better is a recipe for disaster—one that I see it happen all the time. One clear way to avoid the quicksand that is playing “favorites” is to adopt the Netflix payroll methodology—pay employees at the very top of the known salary range at every level, then expect the very best of all employees—rather than paying bonuses at all.

The thinking is this: You are here because we believe you to be the best, we pay you as the best should be paid, and we expect you to do incredible work. From there, if you still feel that you would like employees to be able to share in the success of the firm, develop a revenue sharing plan by setting aside a certain amount once a specific target is hit or exceeded. (I do not like profit sharing plans for small firms; I believe expenses are an area that only you, the owner, should tread.) For example, if sales exceed $1 million, you can set aside 5 percent as a bonus pool. You would then divide that pool according to salary percentage. Remember, if everyone is paid at the very top of their job description, then the relative share of the bonus pool is fair and easily understood.

The key point to grasp is that while bonuses are a way to communicate success, they are not, in fact, communication. You have to be invested in why the money is being paid and its relationship to the success that you alone have determined has happened. Without that commitment to the conversation, bonuses more often than not do exactly the opposite of what you intend—hurt morale, not help.

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Sean Low is the the go-to business coach for interior designers. His clients have included Nate Berkus, Sawyer Berson, Vicente Wolf, Barry Dixon, Kevin Isbell and McGrath II. Low earned his law degree from the University of Pennsylvania, and as founder-president of The Business of Being Creative, he has long consulted for design businesses. In his Business Advice column for BOH, he answers designers’ most pressing questions. Have a dilemma? Send us an email—and don’t worry, we can keep your details anonymous.

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