Pitfalls and Paradoxes: Setting Up Successful Bonus Schemes, a guide for Start-ups

Introducing a bonus scheme within a start-up or small business can be a strategic move with multiple benefits. It’s often seen as a way to foster team performance, attract talent, or even as a response to team members’ growing expectations for performance-based compensation. However, if not carefully implemented, bonus schemes can be a double-edged sword. Instead of incentivising higher performance, poorly designed bonuses may end up disrupting team harmony, fostering a counterproductive competitive culture, or causing employees to prioritise short-term gains over long-term growth. A bonus scheme, like any other strategy, requires thoughtful design and careful execution.

First and foremost, it is vital that any bonus scheme aligns with the company’s mission. It’s not unusual to see bonus schemes that send a different message to that stated publicly by the company. Don’t state for example that customer service is your company’s number priority and then set up an incentive scheme that is focused on sales at all costs.

The scheme should reflect and uphold the company’s values, and act as a tool for promoting the behaviours and outcomes that the business desires most. If a bonus scheme is at odds with the company’s core principles, it will create a team working to conflicting priorities, leading to confusion among employees and potentially undermining the long-term objectives of the business. The most effective bonus schemes are those that are intertwined with a company’s values, ensuring that every reward is a step towards achieving its broader mission.

There are many different types of bonus schemes each with different benefits and their own set of pitfalls.

Performance Related Bonuses

Performance related bonuses are awarded to employees based on their individual performance. These are some of the trickiest to get right. Research has shown that these work best when employees are focused on a simple task with a single priority. For example, if the role involves dispatching parcels, a bonus could be set for the number of parcels dispatched in a day. This would likely work well and get the company the results it is after. If though the role you are trying to incentivise is more complex and has several potentially competing priorities, then research suggests the bonus will not be effective in delivering the desired outcomes. The logic is obvious really; many roles are complex and require judgement by the individual on what the right priorities are at any given time and trying to reflect this in a bonus structure soon leads to a degree of complexity that is difficult for the individual to interpret.

Another issue can be aligning a bonus to the right outcomes. No-one wants to find themselves at the end of a quarter thinking they did a great job for the company, only for their bonus award to say otherwise. As such it is not uncommon for management teams to set bonus structures which take considerable time and effort to administer fairly and consistently. This in itself can quickly cause problems with irregular updates leaving individuals in the dark about their progress towards a bonus and it can soon become a demotivating distraction.

Probably the most common form of performance related bonus is sales commission. This is a complex area, and we will dive deeper into this in a separate blog post, but sales is one area where you do want individuals very focused on a specific outcome, so a well-designed commission scheme can be highly effective.

Profit Sharing Bonuses

A nice idea but be careful such schemes can be full of potential pitfalls. Let me take an example from my own experience. A team set up a profit-sharing bonus after a couple of years of great performance, everyone welcomed it and the team continued to perform well and the bonus was heralded as a great way to recognise everyone’s hard work. A couple of years later though and tough market conditions meant the criteria for achieving the bonus were not met and it wasn’t paid. The management team were blamed and some junior individuals on lower salaries threatened to leave as they felt they were promised that the bonus was always paid as it was dangled in front of them as part of their compensation package. If you are doing well and considering a profit sharing bonus, it may be worth considering an across-the-board salary review as an alternative. This can also be an opportunity to correct any unfairness you may have in your payroll and be just as effective in terms of employee retention. If you are still considering a profit sharing bonus, keep it simple, be very open with sharing information related to progress towards the bonus, or otherwise.

Discretionary Bonuses

Awarded at the discretion of management to reward dedication, exceptional work, creativity, or initiative. There are typically no set criteria which affords the ultimate flexibility, however this may come with the downside of being seen as inequitable or fostering favouritism. Where they might be appropriate is if an individual has done something outside of their day-to-day job such as having presented a paper at a conference that has reflected well on the company. They can also be utilised as part of an internal awards system, perhaps recognising outstanding performance on an annual basis. But it should not be forgotten that recognition can be as important as any monetary reward, and it can be difficult to set the monetary rewards right, especially if your team’s salary range is significant.

Sign-on Bonuses

Sign on bonuses given to new employees as part of their initial package, typically to attract high quality talent. They may be appropriate if the individual who is joining you is foregoing bonus or commission in their previous role to become part of your team. They may also be used to help individuals cover the cost of relocation, especially if recruiting internationally.

Retention Bonuses

These bonuses are typically awarded to incentive employees to stay with a company. They may have a place in mergers or acquisitions, but it should be remembered that retention of key staff is something that should be earned by management rather than something you can buy. You may induce an employee to stay another year or two but is this something that you want if their heart is not in the job?

Christmas or New Year Bonuses

Something that was far more widespread historically, but still seen from time to time today especially in certain industries. But if they are considered by a management team as part of any compensation package, they can be a positive thing, especially in lower paid roles. After all who couldn’t do with a few more quid a Christmas.


In conclusion, while bonus schemes can be a powerful tool in a start-up’s toolbox, enhancing team performance, attracting skilled talent, and catering to growing expectations for performance-related compensation, they should not be implemented without careful deliberation. Their design needs to be meticulously crafted, fully aligned with the company’s mission and values, and periodically evaluated. If mismanaged, these incentives can swiftly transform into a source of disruption, disharmony, and detraction from the organisation’s core objectives.

That said, it’s important for start-ups to think twice before diving headfirst into implementing bonus schemes. Always consider the root issue you’re trying to address and explore possible alternatives. Is it a matter of recognising top performers? If so, there might be alternative avenues such as special recognition, promotions, or even straightforward pay rises. If your team is facing certain challenges or issues, consider addressing them directly rather than introducing a bonus scheme that might inadvertently exacerbate the situation.

At the end of the day, remember that while bonus schemes can incentivise and reward, they should not be used as a band-aid solution for deeper, underlying issues. They are but one component of an effective remuneration strategy and should be integrated thoughtfully, transparently, and ethically.