How do bonuses and pay-for-performance programs motivate employees?

"quota, and it is not uncommon for bonuses to be substantial. Google created a Founders’ Award and once gave $12 million in restricted stock to the winners, a huge spot bonus for great work on a project. For line and staff employees, bonuses can add up to 3 to 5 percent of their annual pay; for middle managers, that figure rises to the low double-digit percentage range. For executives, specifically senior executives, bonuses can constitute up to 50 percent of their annual compensation. That’s not to say that small bonuses aren’t good motivators. Google discovered the large range in values for the award created jealousy instead of fostering better teamwork. Based on employee input, Google changed from monetary awards to experiential awards, such as gifts and trips, and everyone was happier. 17 “Spot” bonuses allow companies to target employees that impact the bottom line and can help motivate average employees. Sarah Clausen received her first bonus from Dallas-based Associa, a property management company, for overseeing the rollout of video-based town halls. “It really creates a feeling that your work is being valued and appreciated,” she says. “It definitely leads me to want to stay here and do a good job.” 18 Regardless of their size, bonuses are replacing the raise as the way companies compensate employees for a job well done and motivate them to perform at even higher levels. That is because bonuses can vary according to outcomes. Financial incentives that allow variability in compensation to reflect an individual employee’s contribution are generally known as pay-for-performance programs. One of the many companies that use pay- for-performance programs is Allstate, which assigns employees’ individual performance one of five grades. The size of an employee’s bonus depends on his or her grade. For example, one worker may receive a bonus of 5.5 percent of her annual pay, but the worker in the next cubicle doing the exact same job—though less efficiently or productively—may receive only 2 percent. The pay-for-performance approach can also be used for CEOs. Tesla announced that CEO Elon Musk’s compensation could be worth up to $55.8 billion over the next ten years, or nothing. Musk’s compensation is tied to the market capitalization of the company. 19 The percentage of annual payroll companies commit for pay-for-performance bonuses has fluctuated slightly in recent years but remains above 12 percent and is expected to continue. 20"