Performance Bonuses that Actually Inspire, Reward and Retain Your Best Talent

When I think about what makes a company hum, it always comes back to the people — our elite business athletes who pour their hearts into our mission. I believe that rewarding those people isn’t just about writing checks; it’s about building a system that fuels motivation, aligns people around our goals, and keeps our best talent in the game.

That’s why I’ve ditched the concept of annual bonuses for a quarterly performance bonus. They are more transparent, easier to understand, and do a much better job of driving results while keeping the team engaged and loyal. Let me walk you through why quarterly bonuses are a game-changer, and how I’ve designed the approach I use.

Annual bonuses might sound great on paper to a board — if you miss the annual plan, we have a way to ratchet expenses down — but the impact on driving performance is all but erased by the year-long cycle.

That happens in two ways. First, if someone crushed it in Q1 and struggled the rest of the year, they never got a taste of what being rewarded for excellent performance feels like. Second, managers really struggle to provide candid feedback, knowing that one bad annual review can be devastating to that employee’s compensation for the year.

I’ve seen top performers walk out the door because their hard work wasn’t recognized in time, and struggling employees linger because feedback was too late to matter. Quarterly bonuses fix this. They create tight feedback loops, tying rewards directly to recent performance. This keeps everyone focused, accountable, and energized.

Data backs this up: companies with frequent reward cycles see up to 20% higher retention of top talent and 14% better performance outcomes, according to a Gallup study.

So how does this quarterly performance bonus system work?

It starts with our annual financial plan, set by the board. Boards love to make this complicated — they say they want focus, but then they have the world’s most complex weighted bonus system. I prefer to make it really simple. Your funding metric should likely be Cash EBITDA (profitability) or Net ARR Growth (ARR growth net of churn for the year). One of those metrics is the primary driver of value creation for your investors, so keep it simple.

I set bonuses for each employee as a range — let’s use $10,000 to $20,000 as our example. I want to have room to overpay our elite performers, so if I can swing it, I’ll budget 110% of the high range. For this employee, their quarterly bonus target would be $2,500 to $5,000, so I would have $5,500 of budget for their salary.

Summing up 110% of the high bonus target for each employee gives us the total bonus pool we should have if we achieve our plan for Net ARR Growth. Obviously, you’ll need a formula for if you miss, and if you exceed plan. I like to scale the bonus pool down to zero at 80% of our quarterly plan. The rate at which it scales up for exceeding plan depends on the ease and likelihood of doing so, and also how many incremental dollars that will generate.

Once we have the bonus pool, and our performance feedback process gives us ratings for the entire team, it allows us to calculate the bonus awards. I tell people that a “Needs Improvement” rating will earn the low number; an “Elite” rating will earn the high number; and an “Excellent” rating will earn the midpoint.

However — this is where it gets interesting and fun.

I require a bell curve distribution on the right side — if you’re telling me everyone is elite, then you just aren’t getting granular enough. But I don’t require a bell curve distribution on the left — some teams are REALLY good at managing out underperformers, or not letting them join in the first place.

Depending on how many “Needs Improvement” people you have, and whether you’ve been able to budget the extra 10% into the pool, you should have some bonus pool dollars left over. One approach is to apply all of those dollars proportionately to the elite performers; another approach is to spread some of those extra dollars to your excellent performers as well.

(If you choose the latter, a good rule of thumb is to give 50% of the extra dollars to your elites and 50% to your excellents, as long as that formula results in the elite performers getting at least 150% of their quarterly high target.)

Let’s do some quick math here: imagine 10 employees, each with the $10,000 to $20,000 annual target.

At 100% funding plus 10% supplemental dollars, the quarterly pool is $55,000. If we have two Elite, six Excellent, and two NI employees, it shakes out like this: NIs get $2,500 each ($5,000 total), Excellents get $3,750 each ($22,500 total), and our Elites are now expecting $5,000 each ($10,000 total). However, I still have $17,500 left in the pool.

I’ll put 50% of that money into the Elites, bringing their bonuses up to $9,375 each. I’ll put the other 50% of that money into the Excellents, bringing their bonuses up to $5,208 each.

That’s a lot of happy, motivated people.

Now let’s imagine that I have no NI employees. I’d probably tilt the formula for extra dollars a little bit more to the Elites, ensuring they get $7,500 each. That would leave $982 in extra dollars to spread across the Excellents, bringing their bonuses up to $4,732 each.

Let’s think about the results of this approach.

“Needs Improvement” employees don’t experience a devastating blow to their annual compensation. They can get things back on track and be in the Excellent column next quarter. And if someone is “NI” three quarters in a row, there is zero surprise if we reach the point that we need to make a change.

“Excellent” employees feel valued, rewarded, and motivated. Their bonus awards are typically exceeding their expectations, if the company is performing well. Bonus is far from being an entitlement — it’s a way for everyone to be rewarded for strong individual performance, and helping the team to succeed.

And “Elite” employees are just loving life. They can’t imagine going to another company where they would get underpaid in comparison. Consistent high performers who experience a quarter or two in elite territory will be asking you for more of next year’s raise in bonus, and less in base salary! Math is math.

This isn’t just about numbers — it’s about building a culture where every elite business athlete knows their contributions matter and are recognized. It’s about turning performance into rocket fuel, rewarding the grind, celebrating the wins, and keeping our best people glued to the mission. It’s how we keep the flywheel spinning, driving results and loyalty that make our company unstoppable.