Result-driven project bonus system
This article deals with one of the ways to assess project teamwork based on ratings obtained in factors that are the most important for the project. The author considers the principles for creating a project bonus system, criteria for estimating effectiveness of the project team, and influence of such assessment on bonus payments.
It should be noted that the project assessment and bonus scheme under consideration is designed for employees who directly execute operations aimed at achieving the project results. Thus, for example, assessment of sales managers is not considered in this article.
The new system is currently used in the company, “Informzashchita”—the leading Russian information security system integrator.
Before the new project bonus system was developed, every organizational unit had its own project assessment and bonus scheme based on performance indicators of the concerned organizational unit. However, a company’s projects increasingly demand close interaction and cooperation between the functional units. This requires a single approach to the project bonus scheme that would be focused on the project goals and goals of the company as a whole.
Assumptions and principles
There is no ideal bonus system. Each separate bonus system should be considered together with the specific character of the company’s activity and project features that are objects of the assessment process. In our case, such project features are as follows:
- The great majority of the projects are projects on system integration and software development. Thus, the major component of project costs is labor costs.
- Project effectiveness cannot be measured uniquely by finance indicators. For example, when implementing a pilot project for a new customer, the company can trade off the profit for the benefit of future relations with the client.
In developing the bonus scheme, major principles were as follows:
- Bonuses should be paid after achieving specific work results; for example, after a document or program module is prepared. It is important that the result is objectively measurable and alienable from the person who did it.
- Assessment of a project member should depend on only those factors that are within the sphere of his influence. The situation when “prizes go to those who did not take part in the project or the unguilty get punished,” that sometimes happens in companies, in my opinion, impairs effectiveness of incentives greatly.
- The bonus to a project member should depend not only on his personal performance results, but also on the general results of his team; that is, on the final results of the work. At first sight, this principle contradicts the previous one. However, an employee being focused on the final result of his team encourages mutual help and makes separate employees a project team. In practice, it is the bonus’s dependence on the team results that faces the greatest resistance of employees. Not everyone is ready to consider his or her results as part and parcel of the general result. However, it is the general result that is important for the company, and not the aggregate of isolated structural modules.
- The technique for calculating ratings and bonuses should be open, simple, illustrative, and clear for all the employees being assessed. Every employees must know the criteria used for assessing their work. In this regard, the formulae for bonus calculation shall not necessarily be simple; the most important thing is that every employee should have an instrument for calculating his future bonus based on results of his work.
- Rating calculation and bonus payment are carried out as soon as the phases under assessment and the project itself are over.
- Bonus is calculated on the basis of ratings (ranging from 1 to 5). Ratings are applied to specific project characteristics (e.g., deadlines, quality, labor inputs). Ratings are based on deviations of the current project data from the base (target) plan.
- The source of objective indicators (deadlines, labor inputs, finances) is a project management system. The source of subjective indicators (work quality, compliance with regulatory documents) is the assessment made by team leaders, project manager, and organizational unit head.
- When calculating the final rating, one should take into account the importance (significance) of various indicators for a certain project. Significance of project indicators is set at the start (beginning) of the project.
Types and calculation of ratings
Ratings are subdivided based on objectives of their usage:
- Base ratings are designed for assessing the activity aimed at achieving the project result.
The rating ranges from “1” to “5.” Here, rating “4” is good, given for achieving the assessed parameters (e.g., for observance of deadlines or quality standards).
- Process ratings are designed for assessing compliance with ruling documents of the company and its organizational units in terms of the procedure of carrying out project work.
The rating ranges from “1” to “4.” Here, rating “4” is good, given for achieving the assessed parameters (e.g., for clear task description).
Ratings are also subdivided based on the degree of objectivity:
- Objective ratings are those that are calculated on the basis of clear quantitative indicators that are provided in the project management system. Examples of such ratings are ratings for observance of deadlines and labor inputs.
- Subjective ratings are those that are calculated on the basis of qualitative indicators and expert appraisals. An example of such ratings is a rating for clear task description to the project team.
Objects of the assessment and bonus scheme are the following categories (roles) of employees:
- Project Manager, Project Management Office;
- Technical Project Manager, Functional Organizational Units;
- Functional Team Leader responsible for achieving results of the element of Work Breakdown Structure (WBS);
- Functional Teams – members of the WBS (functional) Team;
- Functional Team Member.
Figure 1 shows a standard subordination scheme during project implementation.
Figure 1. Subordination scheme during project implementation
One employee can have several roles in the project and, consequently, will be assessed and have bonuses as corresponds to his work in several roles. In this case, bonuses for every specific role are summed up. An employee is assigned on the project roles at the project planning phase and it is recorded in the Project Plan.
Figure 2 contains a list of ratings as well as information on what ratings are given to various categories of employees (ratings – in table lines, roles of employees – in table columns, the table cells show whether this role is assessed with regard to this rating).
Figure 2. List and objects of rating
Total rating is arithmetic average of ratings based on various indicators that are important for the assessed role in accordance with Figure 2, considering the following specific features:
- Total rating is within the range of [1-5];
- Every rating is used in the formula according to its weight that corresponds to importance of this indicator for a specific project;
- If one of the ratings is equal to “1” (the lowest point), the total rating is “1.”
The formula of calculation is shown below.
M- total rating.
M1,…,Mn- project characteristics ratings.
For objective indicators (deadlines, labor inputs, finances) the diagram of rating dependence on the indicator is provided in Figure 3.
Figure 3. Diagram of rating dependence on an objective indicator
The diagram has the following meaning (in terms of deadlines):
- If deadlines are observed, then the rating is “4.”
- If work is done behind schedule, the rating is gradually decreased to “1” proportionally with the delay. In case of minor delay (~5%), the rating does not go down (the so called “tolerance interval”). The tolerance interval is important as a psychological factor. It shows that minor deviations from the planned parameters are not punished.
- If work is done ahead of schedule, the rating goes up, but only to certain limits. The rating is maximum at approximately 20% advancing. With too much lead time, it is reasonable to suppose that planning was not adequate. Thus, increased work efficiency is stimulated, but formation of reserves that are not adequate to project risks is not welcomed.
Subjective ratings are given based on the results of questionnaires.
Calculation of bonuses
In calculating bonuses, the following statements are universally applied:
- The bonus is calculated on the basis of planned labor costs (project costs and employee costs). Of course, it seems more logical to base it upon the project profit return. But, unfortunately, project profit return is not always an adequate evaluation of the mastery of the manager and the project team. Sometimes, for example, a company deliberately sacrifices its profit to obtain a competitive advantage. When we assume planned (not actual) labor costs as the basis, we can predict bonus payments.
- If an employee has several roles in the project (e.g., Technical Project manager and Functional Team leader), he will be assessed and have bonuses as corresponds to his work in several roles. An employee is assigned on the project roles at the project planning phase, and it is recorded in the Project Plan.
- If the rating is “1,” no bonus is paid.
- Bonuses are paid based on the results of every phase (~80% of the project bonus) and the results of the project on the whole (~20% of the project bonus).
- If the rating ranges from “1” to “4,” bonus value changes in a linear fashion from 0 to the value of the planned bonus; and when the rating is over “4,” the bonus increases not in a linear fashion with an advanced bonus at rating “5.” (Bonus dependence on the rating is shown in Figure 4.
Figure 4. Diagram of bonus dependence on a rating
Figure 5, below, contains bonus indicators; that is, characteristics that are considered during bonus calculation as multipliers. The bonus is proportional to the below indicators.
Figure 5. Bonus indicators
Major specific features of the bonus calculation system that are shown in the table are as follows:
- Project manager receives bonuses corresponding to his planned labor inputs for project management. In this regard, the planned labor inputs for project management are standardized on the basis of risks and complexity of the project (its category).
- Technical Project managers of organizational units and Functional Team leaders obtain bonuses based on the total planned labor inputs at the phases they manage – in accordance with the specific character of the work. It is labor inputs at this phase that can characterize the complexity of the phase and, consequently, can be the basis for calculation.
- Functional Team members’ bonus is influenced by his qualification (judging by the grade received in accreditation).
The typical formula for calculation of the project bonus for team member is the following:
L _Cost _PlanWBS - Planned labor costs for an employee.
Emp _ coeff -Constant parameter (currently 30%);
RE - the ratio between bonus paid in the end of the WBS and a bonus paid in the end of a whole project (currently 80% of WBS bonus is paid in the end of the each WBS, and 20% is paid when a whole project is finished)
M _GPMWBS - Total project team rating for WBS result;
M _ EMPWBS - Total employee rating for WBS result;
Qual _ coeff - Employee efficacy (as a result of yearly assessment).
Extra - Extra multiplier to increase bonus when the rating has a value more than “4” (as shown in Figure 4). It’s equal to “1” when the total rating is “4,” and Extra_Coef (currently 1.14) when the total rating is “5.” The formula is as follows:
- When a total rating (M _ EMPWSS) lies between 4 and 5: Extra = (M _ EPMWBS – 4)* (Extra _ Coeff -1) +1
- When a total rating ( M _ EMPWBS) lies between 1 and 4: Extra=1
Based on the current values of the indicators, mean values of project bonuses are as follows (upon achieving planned targets and in case of full workload):
- For Project managers: ~60-70% of the basic salary;
- For Technical Project managers / Functional Team leaders: ~40-50% of the basic salary;
- For Functional Team members: ~30-35% of the basic salary.
It’s important to take into attention that this amount of money could be earned only if an employee works in projects full-time (i.e., 40 hours per week).
In this case, it can happen so that the total earnings of, for example, a project manager will be less than that of a qualified specialist-member of the team. The ruling principle during development of indicators was that the more responsible for the project results the specialist is, and the more control levers on the project development he has, the larger the variable that must form earnings of this employee.
The bonus is paid by the end of each WBS. About 20% of each WBS bonus is accumulated and paid as the overall project completes.
Specific features of implementation
One of the specific features in implementing the project bonus scheme is the relative complexity of calculations. This makes it necessary to computerize bonus calculation with maximum use of objective data of project management system.
Currently, such a computerized system is being developed. It automatically monitors project indicators based on the project management information system, and calculates bonuses based on the project and phases results. To take account of subjective evaluations, the bonus calculation system carries out questionnaire surveys and interviews. In addition, every employee is able to plan his bonus with the help of this system using characteristics of projects in which he takes part.
Ideally, operation of such a computerized system does not require regular administrator interference. The main requirement for proper operation of the project bonus system is adequate planning and project control in the project management system as the source of initial data for calculating bonuses.
Besides, for successful implementation of the bonus system, employees should clearly understand its essence and operation principles. To take account of the specific character of organizational units, comments were prepared to the Project Bonus Scheme Procedure that explain its provisions with examples and considering the specific character of organizational units.
After implementing a pilot project, it became clear that the bonus scheme had to be partially modified. The following modifications were made:
- Qualification (grade) of the employee was excluded from the system because it already plays in the fixed wage of an employee;
- Project category [1-5] (overall indicator of project risk) was excluded from the system because project risks can be mitigated by providing additional labor units as a reserve;
- A new coefficient of an employee’s productivity was introduced. Different employees can do the same job with labor units, and it’s unfair when more productive employee gets less money for the same result because of fewer planned labor units;
- Bonus calculation for a technical project manager was changed. Now he/she gets a bonus only for performing managing functions to motivate him/her to focus on management, not just doing a job him/herself.
- Functional unit manager was included to the bonus scheme. His/her responsibility is to make his/her labor resources more effective. So, his/her bonus is in proportion to the difference between actual and planned labor inputs of his/her department to motivate his/her not to overplan labor inputs.
The above modifications allowed the company to launch the project bonus system into production mode.
Results and Conclusions
The bonus system has been working for one year, and it’s already possible to draw conclusions. The main results are the following:
- Motivation was increased. Now all members of a project team do their best to finish the whole project on time and within planned costs. Now it is not only the managers who want to be on time;
- The accuracy of planning was increased. Hence, the predictability of a company’s resources load is also increased. The risks of overloading and underloading resources is now properly managed;
- Since its deployment about one year ago, the bonus system has allowed the company to successfully manage two times as many projects as before.
The weight of evidence suggests that the bonus system created on the principles of proper and strict measuring of results and transparent criteria is beneficial both for the company and its staff.
©2006 Project Management Institute