I am a huge believer is paying bonuses when a company can afford to pay them.  And there lies the issue.  How do you define “afford”.  I like to define it as having positive cash flow at year end to cover the payments.  Positive cash flow in this context = profit.

With that definition, here are some things that would not qualify:

• “Hey, sweet, we just closed a $3mm Series A”
• “We rock, we just signed an agreement with the largest distributor in the country!
• “Sweet!!  We just got FDA approval for a new drug”
• “Guess what – it is end of year holiday time!”

I hope you sensed a little bit of sarcasm in my text tone.  But yes, I have heard these and more.   Closing a Series A has nothing to do with profits; the investors want the $$ used to build a business.  Signing a large distributor has nothing to do with profits until you start selling lots of product (hopefully at a hefty profit) to the distributor.  Likewise for FDA approval – start selling the drug.  And holiday time, the biggest offender, has nothing to do with profits  and everything to do with emotion.

Motivating the team is obviously key.  Do bonuses motivate?  In general, it is hard to say that they don’t at least help to motivate.  So, at startups its is critical in my view for the CEO to set the tone from the beginning in terms of when bonuses can be paid.  If the team knows from the beginning that bonuses derive from profits that will serve to manage expectations well.  I think of the bonus mentality as an evolution that the CEO controls.

[just pushed “publish” instead of “save”…..sorry….here is the rest]

With respect to holiday time recognition the evolution might look something like this:  Year 1, holiday party.  Year 2, holiday party with $30 Starbucks gift cards.  Year 3, holiday party with $100 Apple Store gift cards.  Year 4, holiday party with $2000 cash bonuses (assuming profits exist to cover them).  Again, the expectation management is the critical component that must be managed from the top.

With all this said, I am 100% fine with paying a one-off bonus regardless of profits to a particular team member for an extraordinary effort.  For example, perhaps the head of bus dev did such an amazing job getting that big distributor signed up that the board decides to pay a “thank you” bonus to this person (despite the fact that the bus dev guy’s job is to get such big contracts signed up).

Look forward to your comments.