Hack

Hack: Bonus Fund: Empower employees to fund initiatives with company-matched bonus money

by Kartik Subbarao - Consultant at Independent

February 18, 2011 at 2:33pm

9 Ratings:

  • Overall 3.78
  • Innovative 3.67
  • Detail 3.89

Contribution Summary

Summary
Empower employees to create and fund their own initiatives by allocating a portion of their annual bonus pay, matched by the company. For example, if 100 employees each allocate $100 of their bonus to project ABC, then the company will contribute an additional $10,000, giving ABC $20,000 of funding.
Problem
This hack builds on the foundation of "20% time" (where employees are free to spend 20% of their work time on discretionary projects) and employee-led communities of practice (e.g. internal guilds). The problem is that lack of funding can significantly curtail their potential. The passion and energy of a community of practice can be drained by heavy restrictions on obtaining money/resources (e.g. detailed cost justifications, long and drawn out budget allocation processes, politics, etc).

Larger companies can also suffer from a lack of ability to do small projects. All it might take to try out a new idea could be a web site design for $250, a $20/month hosting service for a few months, and $100 for some search engine ad keywords to build publicity. But by the time the idea has gone through the company's formal approval process, the window of opportunity might well have passed; the idea may have been watered down beyond usefulness by those in the approval chain wanting to "add value"; or the idea may end up being coldly rejected without explanation, deflating the morale of the employee who came up with it.

From the management side, some managers may feel that many employees do not have sufficient apprecation for how corporate funds need to be allocated, since it is not their own money. Also, some managers who support 20% time and communities of practice may feel like they are extending themselves, and as a result may be reluctant to risk additional monetary and political capital on employee initiatives that have no guarantee of returning immediate results.
Solution
Set up a web site affiliated with each community of practice where employees can submit ideas for projects/initiatives that require funding. The Internet site kickstarter.com is a good example of the kind of interface and features that would be useful for this type of site. A submission to the web site should have the following components:

  • Description of project/initiative
  • Minimum amount of employee contribution required
  • Desired amount of employee contribution requested (if above the minimum)
  • High-level breakdown for how the funds will be used
The submission is then reviewed by the leadership team (usually non-managers) of the community of practice. Using very broad and generous criteria, they decide whether to accept or reject a submission. A submission will typically not be rejected unless it is entirely outside of the scope of the community of practice (e.g. an idea to build woodworking sheds proposed to a community of practice for database developers), or it directly contradicts the core mission/principles/values of the company.

Once the submission has been posted to the site, the members of the community can express their support (e.g. "like" button). An idea that has more than N number of supporters (N can be 1) is open to the pledging of funds. Once the annual bonus is announced, employees have a time window (say 2 weeks) to pledge a portion of their bonus to any number of ideas, up to the full amount of their bonus. During this time, they can freely shift their pledges back and forth between projects, as they observe how their peers pledge funds. At the end of the time window, all projects that have met their minimum funding requirement will have their pledged funds matched by the company, and the net amount is then allocated to the idea submitter's budget.

Let's look at an example. John submits a project to the web development community of practice with a minimum employee contribution requirement of $200 and a desired contribution of $500. The project, a professionally produced video and web site that showcases the company's expertise with an emerging web technology, is approved by the leadership team of the web development community and posted to the site. Five of his colleagues support the project, and three of them pledge $100 each to the project. John himself pledges $200, leading to a net pledged amount of $500. The company pays out a bonus that is sufficient to cover all of the contributions. Since the minimum requirement is met, the company matches the pledged funds and the project is funded for a net amount of $1000 which is allocated to John's budget. Employees use their 20% time to work on the project. John and his colleagues star in the video, and get a lot of visibility for themselves and for their company. The next year, John's management formally sponsors him to represent the company on an industry web standards board.

By limiting the employee contributions to bonus money, the company has a capped, controllable cost each year. The bonus pool will naturally reflect the company's prosperity, and its ability to contribute to the bonus fund. When business is booming, the company can afford to fund plenty of employee ideas. When times are tough, program funding will be reduced automatically.

It's entirely possible that some of these ideas will lead to new products and services that will generate additional revenue for the company -- in which case the company could pay back the employee contribution along with a dividend, in recognition of the employee's willingness to invest their own money at the very beginning.
Practical Impact
Employees who have a strong personal commitment to their fields of expertise will gain access to more potential funding for their ideas. This can have an impact on both a small scale and a large scale, and increase employee engagement with their communities of practice and with the company as a whole. Here are some illustrations that capture some of the impacts:

  • Communities of practice are often full of people who think alike and have similar skillsets. As a result, they also have common weaknesses. For example, software development engineers are not usually the best at creating visually compelling presentations. And those inside the company who might be able to help are often busy or otherwise unavailable. By freeing employees to contract for talent outside of their companies, they can fill the gaps in their skillsets quickly and move forward with their ideas more successfully.
  • For people who talk the talk, the Bonus Fund gives them a way to put their money where their mouth is. Instead of complaining about why they can't get funding from bureaucrats who "don't get it", they can now appeal directly to their peers for support. If their project is successful, they've proven their concept. Even if they fail, they've learned a valuable lesson about what doesn't work and can move on to other ideas. Either way, they're expanding their understanding and developing their capabilities.
  • IT employees can bypass layers of management and contract directly with open source software developers to implement features that are of immediate value to their jobs, while simultaneously advancing the state of the art for the whole industry. They can also donate funds to non-profit technology organizations (e.g. Mozilla Foundation, Linux Foundation, Eclipse Foundation, etc) to support open standards-based, open source solutions in their areas of work. There is plenty of precedent for corporate matching funds for employees who donate to charitable organizations. There is even precedent for employees contributing their own money, without any matching funds, to corporate political action committees over which they have no direct control. Technologists can be as personally committed to their ideals as others are about influencing government and advancing other causes. Having their company support their ideals can be a huge boost to their overall job satisfaction.
  • Employees who share knowledge freely and widely, who raise the level of overall knowledge and wisdom in their community of practice, will have gained a strong reputation among their peers, and will likely attract a commensurate level of contributions to their projects. A group of highly respected employees might be able to finance ambitious projects through the Bonus Fund, sustaining efforts largely through the continued support of their peers. As a result, they can take the long view, keeping the company's highest vision and fundamental purpose in mind, and not have to compromise as often on shorter-term tactical points.
According to payscale.com, as of January 2011, US Companies with over 5000 employees have median annual bonuses of approximately $5000, so there is an ample source of funds:

http://www.payscale.com/research/US/Country=United_States/Bonus/by_Company_Size

Even if only around 10% of the population in these companies choose to participate in the Bonus Fund, and they each only contribute 10% of their bonus, that's still an impressive $250,000 of employee contributions, which when matched yields $500,000 a year that employees can spend at their discretion on projects that are the most compelling to them!
Challenges
The Bonus Fund gives up a not-insignificant amount of management control in exchange for unleashing the creativity and freedom of employees to pursue projects that will increase their engagement, improve their effectiveness, and ultimately make the company more successful. Managers need to understand this tradeoff and be able to adapt to an environment where employee projects coexist along with traditionally sponsored projects. Ideally, managers will closely observe the employee-sponsored projects as datapoints to discern areas of maximum employee commitment, and will incorporate these patterns into the company's core activities at every level, as best as possible. But this is no easy feat, and the larger the company, the larger the number of managers who need to develop this level of acumen.

From a purely fiscal standpoint, the Bonus Fund is self-adjusting as explained earlier. But in a difficult economy, employees will likely spend less on discretionary activities such as Bonus Fund projects. Also, if there are any threats of layoffs, employees may be reluctant to pursue projects that are outside of the ordinary. Human behavior is complex, and although there are ways for Bonus Fund projects to develop a momentum that sustains their activity in down times (indeed, it may be a rallying beacon amidst an otherwise gloomy environment), it's also very possible to lose momentum during downturns that can be difficult to recover.

Another challenge is that money can affect the dynamics between people in unpredictable ways. Colleagues who collaborate highly effectively on essentially volunteer projects might view things differently when their money is directly involved. While this does allow people to surface and process some of their dormant psychological conditioning around money in a relatively nonthreatening environment (a community of their peers with whom they share much in common, in the context of a company that is contributing to their financial security), it does have the potential to introduce more interpersonal complexities among colleagues. A few ground rules that can be reinforced by leaders in the community of practice could include that participation is entirely voluntary, and that pressuring people to pledge money is frowned on. Over time, the organization can monitor the program's influence on the culture and make adjustments as needed.

I think the best way to address all of these challenges is to implement the Bonus Fund on a smaller scale at first, see how people behave, and then incrementally refine the system. As one part of the organization develops experience with this, it can offer targeted coaching to managers and employees in other parts of the organization on best practices, lessons learned, etc.

An ambitious challenge for the Bonus Fund is whether it can actually draw out participation from people who otherwise might not have been confident enough to invest in their own ideas. If it can create an atmosphere that encourages people to trust in themselves, with the support of their peers, then it is effectively developing leaders throughout the entire organization.
First Steps
It would be fairly straightforward to set up a web site to capture employee project ideas. The technical aspects of the system could be tested out with "virtual money" instead of real money. But the real pilot test would need to be run with real money with a small part of the company. This experiment would likely give a baseline indication of whether the company culture is ready for the Bonus Fund, and if not, what would need to be established in order to run a more succesful pilot.
Credits
I'd like to thank Gary Hamel, Dan Oestreich, Chris Grams and Carl Dierschow for providing highly thoughtful feedback. This has helped me to strengthen the idea in various places, and encouraged me to think more broadly about its various benefits, tradeoffs and opportunities.
Tags
bonus, bonus fund, matching funds, communities of practice, 20% time, markets
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Comments

Orin Davis

An absolutely fabulous idea and a great way of promoting engagement!

Greg Stevenson

Great Idea. I've been working on a remuneration related system myself. Thanks for the link relating to pay scale. It may well help me to justify my own financial model.

I just came across a cool video about what motivates us by Pan Pink which I think lends credence to this idea. http://vimeo.com/15488784

Kartik Subbarao

Thanks Greg. I like Dan Pink's work on motivation as well. Many folks are focused on external motivation and overlook the power of intrinsic motivation, particularly for knowledge work.

Tim Chambers

Reminds me of Gifford Pinchot's exhortations for intrapreneurship and might be a tool to overcome Clayton Christensen's innovator's dilemma. But I'm going to get in the spirit at the MIX by offering a contrarian view. I am jaded by my experience with bloated, calcified corporations that resort to innovation by acquisition. I believe innovation has to happen in smaller, nimbler companies. I'm testing my belief at JDSU. It's barely over the 5,000-employee line. I'm encouraged thus far. They have an energetic process for encouraging innovation. Feels like Bill & Dave's old company.

Kartik Subbarao

That's great to hear that you're feeling encouraged to innovate at JDSU! I know you have a lot of thought-out ideas and it's good to have an environment where you can put them to work. If I may make a suggestion, I've found that this MIX site is full of intriguing stories/hacks and people who comment intelligently on them. Sure, it has its share of back-and-forth rambling too, but the level of thinking I've seen here is higher than I've seen at other sites. You might want to consider posting some of your innovative thoughts and seeing the kind of feedback you get. For us open source folks, it's a great way to build on top of each other's work and stand on each other's shoulders.

Dan Oestreich

Kartik

I think this is an excellent idea. It reminds me a bit of http://www.kickstarter.com, which if you haven't already seen would be worth a look. The idea of "voting" for projects to go forward with money from your own pocket overcomes many of the problems with other incentivized collaboration/innovation schemes. What I like about it in particular is that it closely resembles the natural process of friends going into business for themselves, compelled by a great idea -- so great they are willing to share in the expenses to get it going.

I think you also rightly point out that money changes relationships and perspectives and there is always a possibility that people will try to game the system or -- in this case -- game each other; again, very much like friends going into business for the first time. I think we'd have to expect, as we do in so many entrepreneurial contexts, that there will be some problems and also some successes, and we can't control it all -- we just go forward. I would add that it might be good to be thinking about the culture that you would want to create as a container for this effort. That container on one level could be very simple: a few well chosen ground rules. One might specify, for example, that participation is voluntary; that pressure for others to contribute to a specific project is totally uncool. On another level, that culture could be more definitively explored by a representative board that reviews and fosters the process, watches for problems and encourages the best from the total community, both in terms of outcomes and trust-based collaboration. This would create a "meta-level" to the project that could help adjust the "container" at any point, essentially continuing to build the plane while you fly it.

This is precisely the sort of idea that should be tried out and if it does not immediately succeed, stay with it to learn, revise and renew until it delivers on its fabulous potentials. New processes of this kind take some time and patience, I believe. They may release flood-gates, but its possible people could be a little tentative. So encouragement, small meetings to share a few ideas, the creation of web tools together, informal starts, and so on, can help create the right kind of community "field" that balances the notion of 'hot ideas' with an invitation that welcomes voices and ideas that have not yet been heard. It's easy to make the assumption that everyone automatically has the confidence to join in such innovative work to share what might be, and there can be judgments that those who do not deserve to be pushed aside. But there are many reasons why people may hesitate and so along with everything else, the challenge, it seems to me, is to create something that is truly inclusive, that actively draws out the best in others, that helps people trust in themselves and then invest in their own hot ideas. I think your approach, with the right kind of tone, could do this extremely well, and would be an incredible contribution to any company as a seedbed for both ideas and the development of people.

Best to you and good luck!

Kartik Subbarao

Your insights are very helpful Dan! I like the way you frame the meta-level that adjusts the "container" to align with the big-picture goals/principles/values, while still allowing things to "go forward" and not trying to control everything. Your suggestion of ground rules is valuable -- these are the kinds of specific messages that leaders in the community of practice can reinforce, guiding principles that as they lead by example will encourage others to do the same.

Thanks for reminder on kickstarter.com. I had come across it several months ago but hadn't checked it in a while. I agree that its look and feel would be an ideal starting point, possibly even a drop-in fit for this application.

This is a great observation of the idea's potential that I hadn't even considered: "the challenge, it seems to me, is to create something that is truly inclusive, that actively draws out the best in others, that helps people trust in themselves and then invest in their own hot ideas".

Thanks for your support!

Carl Dierschow

Very creative idea, Kartik. Certainly when people are betting with their own money, they're going to work hard to understand the payoff. And if you have a great idea, you're going to put a lot of passion into developing your network of supporters!

When looking for business proposals, I would also have people describe the payoff or benefit of the idea. At an early stage it's too much to ask for an ROI, but you want to dig into:
* How does this benefit the company?
* How does this give value to society?
* Why would customers love this idea?

You want to have people working to develop their BUSINESS understanding, not just jumping on ideas because they're techically neat.

Another challenge I'll give you: How can you give some kind of benefit back to the investors if the idea works out? It's one thing to ask people to invest their hard-earned money for the general benefit of the larger corporation, but it would be much more motivating if there was some kind of stronger recognition or even monetary payback.

Cool idea!

Kartik Subbarao

Thanks Carl! Let me answer your last question first -- in the "Practical Impact" section of the writeup, I do mention this: "It's entirely possible that some of these ideas will lead to new products and services that will generate additional revenue for the company -- in which case the company could pay back the employee contribution along with a dividend, in recognition of the employee's willingness to invest their own money at the very beginning."

Regarding the framing of proposals, I think that business-focused proposals could benefit very much from answering the questions that you pose. But there will be other proposals that don't fit into that category. The benefit to customers or society as a whole may not be known in advance, and the submitters may not have the ability or interest to quantify the benefit to the company's balance sheet. That's not as important to them, and, more importantly, it's not as important to their target investors. The submitters are reaching out to fellow practitioners in their community of practice whom they can convince with qualitative and quantitative information relevant to them, not to a VP somewhere up in the management chain.

For example, let's take a cloud services company with a Networking community of practice. Currently, the company is using an inexpensive proprietary VPN software package that meets the basic requirements. However, the IT professionals who manage the company's VPN infrastructure find it very cumbersome to work with, since it has poor error reporting and there is no access to source code. Advanced users (some of the most respected engineers in the community of practice) also are very irritated by the product's limitations. Meanwhile, there is an open source VPN package that everyone would much prefer to use, but it lacks the highly complex feature ABC which is required in the company's environment. IT management would have no objections to replacing the proprietary product with the open source product, since the support costs would be roughly equivalent, but they are unwilling to fund the necessary development to implement the ABC feature in the open source product. This kind of scenario can play out for years, all the while acting as a visible symbol for "out of touch" management and a frustrating IT environment.

The Bonus Fund gives the community of practice the tools to break this logjam. They know that all they have to do is collectively come up with 50% of the funding for feature ABC, and they can make it happen. (In fact, the very existence of the Bonus Fund may be enough to satisfy them in some cases. If the root cause of a particular frustration is the feeling of lack of control over one's environment, then regaining that sense of control can diminish or even eliminate the frustration. Without sufficient control over one's environment, all of the frustrations loom large, and the pain of one reinforces the other. With some amount of control, one can prioritize issues, work on the most important ones first, and derive a measure of satisfaction that positively influences everything else).

Let's say that in this case, 50 employees contribute sufficient funds which are then matched by the company to pay a highly specialized developer to implement feature ABC. They then deploy the open source VPN product, which solves all of the previously-encountered problems. The company gains a positive reputation in the open source VPN community (some of whom are potential cloud services customers or even future employees). The Networking community of practice is proud of their accomplishment, and they develop a stronger sense of camaraderie. They share knowledge even more freely, and through collaborating on this project, they end up learning a lot more about VPN technology and about contributing to open source projects, which makes them smarter at doing their jobs. These largely qualitative benefits are more than enough return on investment for those who contributed to the project.

Hopefully this illustrates one type of "non-business" Bonus Fund project that can make a big difference in employee engagement and effectiveness.

Chris Grams

Hi Kartik! Glad to see a member of the open source community contributing a hack!

I think this is a compelling idea, and love the idea of management giving employees tools to put some of their own "skin in the game" on projects that are important to them. The reality is that people are so much more passionate about implementing their own ideas than implementing the ideas of others, that this kind of program might work.

I do wonder whether forcing people into a tough decision of "I take the money to help a work project I believe in" vs "I take the bonus and feed and clothe my children better" might be difficult for those with many responsibilities beyond work.

So a thought on a hack to your hack... Perhaps rather than being a part of their bonus pool, it is a fund that gives everyone in the company "budget." So rather than just managers and execs having budget, all regular folks in the org have some small amount of money to play with as well that they can use for projects they believe in.

While this takes some of the personal accountability angle out that gives your idea its power, perhaps there are other ways to replace with a carrot instead of a stick. Perhaps those who invest their "budget" in a project that creates a revenue opportunity or meets other success criteria are eligible for a big bonus. So those who invest in the best ideas still win financially.

In this scenario, those who do a good job selling their project stand a good chance of getting it funded, and every employee becomes a mini-VC:)

Kartik Subbarao

Thanks for the feedback Chris and for building on the hack! The various parameters of this idea can certainly be tweaked based on how well they might take hold in a given corporate environment -- the source of funding is one of those parameters.

Some thoughts off the top of my head on the tradeoffs involved there. If we change the funding from the employee bonus pool to an a per-employee budget, we then have to decide how to allocate that budget. Does everyone get an equal share? If so, is that fair, or not? Is there a risk there of gaming the system where people find ways to launder their budget allocation into an extra bonus for themselves? If everyone is allocated money, does that spread things so thin that it takes 100 people to pool together a meaningful amount to fund "real" work? (Or maybe that is seen as a good thing by some?) There may be solid answers to these questions, and maybe some of these questions become irrelevant if the initiative is successful enough. I'm just throwing them out as food for thought.

One benefit of the bonus fund approach is that there doesn't have to be any new decision-making on how much money each person gets. People's salaries and bonuses are already defined outside of the bonus fund, the only new money is the company match which involves no decision-making -- all projects that receive sufficient pledges are matched. This takes some of the politics and gamesmanship out of the equation.

A fundamental question that your comments prompt me to reflect on is how people perceive their bonuses. Do they see it as a critical part of their compensation which they treat just as they would their base salary, or do they see it as discretionary money where a part of it could be spent on anything they want. I suspect there are a wide range of answers to this question among different people, and among the same people at different stages in their lives/careers. Maybe it would make sense to do a "behavioral economics" type survey of the employee community to get a better feel for that. Even with people who view bonuses the same as ordinary salary though, as I mention in the writeup, employees regularly contribute to political action committees where there are no matching funds, and employees donate to charities with corporate matching funds. So it seems to me that there is at least some willingness on the part of people to contribute their own, hard-earned money in conjunction with their company towards goals that they deem personally worthy.

I like your image of turning every employee into a mini-VC. That triggered another thought -- managers now have yet another incentive to treat their employees well, because they may be talking to future investors in projects that they may want to get funded :-)