Just rewards?

If you’re a Microsoft engineer, your annual rewards should appear in your paycheck about now. I revealed the dynamics of rewards discussions (aka people discussions; calibration, for old-timers) in Out of calibration. I argued for how they should work in Discussing rewards for people. What is still a mystery to many engineers is how the rewards themselves are allocated. You know—the money.

Microsoft has gone through many different rewards systems over the years, but the budgeting for rewards has been fairly consistent. These days, employees no longer get a rating, but they still get allocated a certain amount of stock, bonus, and salary from the rewards budget. These days, managers talk about zero rewards (0%), partial rewards (60% or 80%), full rewards (100%), and greater than full rewards (120%, 140%, 160%, 180%, or higher in rare cases).

So, how should you feel about the rewards you received? Why did you get the amount you’re seeing on your paycheck? What should be your target? Great questions. Let’s answer them.

What I really, really want

You should be happy if you got full rewards (100%). That’s your target unless you’re getting promoted. “But I’m great! I worked so hard! I got so much done!” Good for you. You deserve full rewards. If you got more without getting promoted, that means you’re surrounded by poor performers, which is an awful environment to work in.

Naturally, there are exceptions. Sometimes people get extra rewards because there’s additional rewards budget that year (once every 5 – 10 years). Sometimes people get extra for retention, to correct for past reward injustice, or to acknowledge just falling short of a promotion due to budget or timing.

Regardless, your happy target should be full rewards unless you’re getting promoted. Why? Let’s follow the money.

Money, money, money

The rewards budget varies from year to year, but it’s typically around 110% of current rewards. Thus, theoretically, everyone should get 110%. Yet contrary to popular belief, not everyone is above average.

When someone is promoted, they typically get 140% or more. Why? Because promotions are for people who are having more impact than their peers at their level. Managers always give 140%+ to people they want to promote because no skip manager is going to approve a promotion for an employee whose manager only gives them 100%.

If one employee receives 140%, another employee at the same level must get 80% to balance the rewards budget: (140 + 80) / 2 = 110. However, the number of promotions at a given level doesn’t typically correspond to the number of poor performers at that level. (I’d hope not.) That leaves a shortfall.

Alternatively, if four people at the same level get 100%, that allows one of their peers to get promoted: (140 + 4 * 100) / 5 = 108. Promoting one in five people at a given level is about the right percentage. It’s no coincidence.

Someone’s gonna pay

If you got promoted last year and got 140% rewards, then worked very hard this year and had a tremendous impact, you might be disappointed at getting 100% rewards this year (full rewards, but a 40% drop from last year). You might question the rationality, decency, and intestinal fortitude of your manager.

However, if you get 140% without a promotion, someone else is paying for it by getting less than full rewards, since your full-rewards peers paid for folks who did get promoted. Perhaps your team has a few poor performers who can pay the extra bonuses, but that’s not a good thing, and it’s not sustainable.

Poor performers get managed out of the company eventually, leaving only strong performers like yourself. If you and the other strong performers expect 140% rewards every year, your manager will be forced to penalize strong performers for minor mistakes to balance the rewards budget. And I don’t mean a minor penalty of 80%, because that won’t be enough to differentiate promotions. It’s not uncommon for good people to be assigned zero rewards during people discussions in the name of balancing the rewards budget and satisfying staff expectations.

That’s not fair

“Good people getting zero rewards? That’s not fair!” Yeah, it’s not. Nonetheless, managers are often expected to come into people discussions with balanced rewards budgets. If those managers have fewer than 50 reports (and most do), then good people could be assigned low rewards.

How do we prevent good people from getting low rewards? Here are a few solutions.

• Don’t expect managers with fewer than 50 reports to balance their rewards budgets. That solution makes sense, but in practice, it doesn’t scale. Most managers have fewer than 50 reports. If they all come in with most of their staff above 110%, which you can pretty much guarantee, then people discussions become a bloodbath.
• Avoid 80%, 120%, and 160% rewards by rounding down. If someone should get 80%, give them 60%. If someone should get 120%, give them 100%. If someone should get 160%, give them 140%. Doing this simplifies rewards assignment and frees up money, while providing similar rewards with similar messaging. Often, managers end up with extra funds, which they can use to rectify unfair rewards.
• Set realistic expectations: Great work gets full rewards (100%), and promotions get greater than full rewards. These realistic expectations fit the 110% budget and allow managers to come into people discussions with balanced budgets without penalizing good people.

“But if I get full rewards regardless of how hard I work and how much impact I have, why should I even try?” That’s an excellent question. First, remember to live a balanced life. Burnout is real—avoid it. Second, if your management avoids 80%, 120%, and 160% rewards, there should be funds left over to sprinkle on folks with unusually strong impact. Third, you should always be building toward your next promotion. A weak year hurts your cause and delays your future career growth.

Don’t worry, be happy

Rewards allocation isn’t mysterious alchemy. It’s a straightforward budget exercise mixed with intense emotion tied to hopes and dreams. The rewards budget is 110%, which means everyone should expect to get 100% (full rewards) unless they are being promoted or their performance was subpar. Nearly everyone getting full rewards allows one in five people to get promoted.

Providing additional rewards (or more promotions) requires penalizing some of your peers by giving them less than full rewards. Sometimes that’s appropriate, but on good teams it isn’t, and you should hope to be on a good team. Instead, you and your teammates should expect full rewards unless you’re up for promotion, and your management should avoid 80%, 120%, and 160% rewards, and instead round down to free up extra budget and ensure fairness.

Getting full rewards is awesome. It’s more compensation than most surgeons, small business owners, and other professionals make. With sustained hard work, strong business impact, and a growth mindset, you’ll get regular promotions and reach your financial and professional goals. That’s the one remaining secret of rewards allocation.