Employee Bonus Programs: Advice From 5 Software CEOs

By Abby Sorensen, Chief Editor

If you ask any software company to spell out business-related headaches, you’ll likely see “attracting and retaining talent” on the list. It’s why so many executives I talk to are eager to tell me about their software company’s culture. And it’s why I wasn’t surprised to get an email from a reader earlier this week asking if we had any content about employee bonus structures. This company was thinking about moving away from an annual bonus in favor of more timely rewards that would be tied to individual roles.

I reached out to a few CEOs and founders of successful software companies to see how they approach bonuses. Here’s what they had to say.

CEO and co-founder of a 40+ employee IT software company.

Our bonus structure is flat, meaning it's not role based. Our line of thinking was salaries are role and value based, but the bonuses are not. How we factor it is that at the beginning of each quarter we review the previous quarter and we take 5 percent of the quarterly profit and divide it among all the employees evenly. Right now, we have about 40 non-founder employees. So, whatever the amount is we take 5 percent and then divide it by the number of non-founder employees. 

This keeps employees engaged and knowing that the success of the company has a direct impact on their pocketbook. Obviously for lower salaried positions (ex. a front desk admins) they see a bigger increase based on their salary versus a developer who is taking in a six-figure income. But we haven't seen (and we've looked) for animosity from the staff. We like the way we do it and will likely continue. 

-----

CEO of a healthcare practice management software company.

For the longest time (before me becoming a CEO) my company had the tradition of giving out year-end bonuses to all employees, except the ones that have commission as part of their remuneration. For employees receiving a raise, they would not receive a bonus. The bonuses had nothing to do with performance of the company, which was a known fact. One change that I introduced as soon as I started is that all employees receive a bonus, whether they have commission for their remuneration or not. This is due to the fact that employees with a base + commission structure have a lower base salary. So, they should not be “punished” because of that.

Another change incorporated company performance (cashflow-wise) into the decision-making process of issuing bonuses. If the company is not performing well (negative cashflow), then handing out bonuses has two main problems:

1. It makes the negative cashflow bigger (which makes any action plans more difficult to execute).
2. It indicates to the employees that everything is ok (when it is not).

I am still looking at different remuneration structures (sales with commission) and bonuses and constantly evaluate different approaches.

Prior to changing anything, I’d recommend speaking with employees (all or at least a few select ones). This can give executive teams information about whether or not the employees would like to change it and perhaps even some ideas as to what to change it to. Speaking with the team and not just telling them a change is happening is a good way to get employees involved in the decision-making process and have more people happier with the outcome.

Depending on the size of the company, I would recommend certain bonus structures. For smaller companies, have one bonus for all employees, while remuneration structure is done per employee or per department. For larger companies, bonuses per department or business unit might work better.

-----  

CEO of a 350+ employee IoT software company.

We only do annual bonuses.  It's pretty simple: the pool is a percentage of profits. That pool is split by a formula across the company based on a merit metric, salary, location, etc.  We pay it in January.

-----

CEO and co-founder of a 100-employee SaaS company.

We actually don’t do annual bonuses today – any bonuses are actually based on a quarterly check-in & performance review. Happy to chat more about it.

------

CEO and co-founder of a 500+ employee testing automation software company.

We have our bonus program scheduled to distribute monthly as well as quarterly. The source our bonus comes from is primarily revenue-based, and secondarily, net-based. Our distribution structures have the following parameters:

• Fixed portion
  • A percentage of the revenue pool will be allocated for fixed-portion.
  • Everyone will get their part of the fixed-portion.
  • The amount of this portion varies based on the role of the staff. For example, a manager will get more than a lead, a lead will get more than an engineer, etc.
• Variable portion
  • A larger percentage of the revenue pool will be allocated.
  • Everyone will get a different amount based on their performance.
  • We have a variety of KPI’s with a different, weighted score for each. Each employee is scored based on the system:
    • The more points one scores, the more money one would get.
    • Each point has an equivalent dollar amount associated. We take the total pool value and divide it by the total number of points to come up with dollar amount per point.

It’s not necessarily a perfect system, but it’s a reasonable system that of staff is happy with.

-----

Want to share how your company distributes bonuses? Or do you have unique programs in place to attract, retain, and incentive your software company’s employees? Drop me a line at abby.sorensen@softwareexecutivemag.com.