Why Cash Bonuses Make No Sense in Startups

It’s tough competing for candidates with the likes of Google, Amazon, Microsoft and Facebook. In the past 6 months, we’ve lost bids for half a dozen or so engineers to these companies, and more than a few mentioned the additional cash bonuses as one of the reasons they were motivated to choose these companies over us. Despite this, I’m holding on to my long-standing dislike and distrust of cash bonuses at Moz and at startups in general.

Don’t get me wrong, I’m not a penny-pincher at all. In fact, Moz pays above the 75th percentile for nearly every position on our team (we get lots of fancy salary survey data, but Payscale, SimplyHired, Indeed, etc work fine). We’re extremely generous (at least statistically speaking) with stock options, benefits, healthcare, meals, and anything else you can think of. It’s a point of pride for our team and part of our core values.

No – I’m against cash bonuses for entirely different reasons.

First – cash bonuses, contrary to what “rational” theories of economics tell us, do not incentivize nor spur better performance. As Dan Ariely explains below, they’re actually negatively correlated with performance on cognitive tasks.

Dan Ariely: Irrational Economics from PopTech on Vimeo.

Second – Stock option based bonuses are a far better retention tool, both psychologically and practically. Stock options, once granted, vest over time. Cash is immediate, and can often be the impetus for a new job search. Microsoft is famous for having thousands of employees waiting to receive bonuses, then examining alternative career options each Fall. Google’s the same way.

Third – More money doesn’t actually make us happier or more productive. As a startup, you’re most likely better off using those dollars toward salaries (which are big for retention and for when employees examine their outside options), benefits, special perks, company vacations – basically anything that delivers happiness that a person wouldn’t ordinarily select for themselves. There’s a bunch of good science behind this; too much to ignore.

 Fourth – Cash bonuses can create incentive challenges and inequity amongst team members. Sometimes, the incentives set up for a cash bonus at the start of a year don’t match to the strategy or tactics you want your team pursuing by year’s end (or worse, it incentivizes performance at the cost of culture or core values). Bonuses are also usually tied to level or a percent of salary, meaning that the rich get richer and the other pay tiers receive less (even if their efforts were more critical to the achievement of a bonus for a group or the entire team).

Fifth – Many companies use cash bonuses as a retention-forcing tool. Basically, you’re given a bonus, but if you leave within 12 months, you’ve signed an agreement saying you’ll pay it back to the company. For many folks, this de-motivates them from seeking other opportunities. I don’t really like that at all. I understand why it might be practical for something like the paid, paid vacation (because you don’t really want to fund a new-job-seeking tour), but in raw cash circumstances, it feels completely non-TAGFEE. If the employee’s earned that money through their prior good work, let them keep it. If it’s money they haven’t yet earned, don’t pay it out. Your company should find far better ways to retain talent. Money will only go so far (and will likely retain a lot of the wrong kinds of folks).

I’m certainly still a novice at running a startup, but many of the advisors and other CEOs I’ve spoken to either reject cash bonuses or are frustrated to be saddled with the challenges that accompany it (and have advised against going down that path). For now at least, I’m a far bigger fan of using those resources elsewhere and using stock options, recognition, promotions, and salaries.

That said, I’d love feedback – it’s very likely I’ve not considered all the angles on this issue.