If two people are both performing at about the same level, they can get the exact same bonus. In a ranked system one employee must get more than the other, even though their actual output is pretty close to identical.
Not to mention when you make the ratings tied to rewards, as opposed to punishments, you're removing a lot of politics. Stack ranking discourages high performers from working together, as their performance rating is penalized by their proximity to smart people. Because stack ranking is inherently punitive, this also makes these employees less mobile. So not only are you stuck in a team full of super-ninjas who make you look bad, but the stack rank you got makes you toxic when it comes to internal transfers.
A fixed bonus pool won't fix the "everyone near me is too smart" problem, but it at least would give people a way out to another team. An otherwise good employee who rolled the dice wrong when picking teams does not gain a permanent black mark for it.
It also opens the possibility of giving a team of all rockstars, if they're (as a team) performing highly, a bigger reward pool that can be split evenly between them.
I seem to think it's much easier to convince them your awesome team producing awesome products (and taking in awesome money) should get extra money to spend than it is to convince people you shouldn't have to rank any of your employees lowly when they all have to.
I honestly don't even get why reward pools are such a big deal.
I do work for you, I am owed compensation based on terms we've negotiated before I started working for you. From time to time these terms will come up for renegotiation.
There is no need for compensation in excess of what we've negotiated. Sure, I am not one to turn down free money, but understand that this does not affect our normal compensation discussions.
My work is worth $X on the market. I expect that you will pay me $X (or come up with alternative forms of compensation that are mutually agreeable). I will not sign a deal that adds up to $X where part of the compensation is discretionary. My work is worth what it's worth. If it is not up to your satisfaction, you are free to terminate this relationship or renegotiate my pay. You may not unilaterally decide to pay me less than what we agreed upon, and I will not submit to a system that allows this.
Which is to say, you will be unsuccessful if you try to persuade me to lower my base salary on the promise of "bonuses".
I feel that "bonuses" are just ways to hoodwink people who haven't been around the block. Every time I have come across bonuses of this variety, it has been an excuse to lower your base salary. I have never once received the full possible bonus, even though I have been promised multiple times prior to joining the company that "everyone" gets the full amount, and that only very poor performers don't. I have never received a poor performance review.
If you do not pay me $X, whether in salary or in bonuses or in suitcases of bacon, I will leave. I do not give one flying hoot about stack ranks, bonus pools, or any such nonsense. I am not willing to inject uncertainty into my income without a proportional upside for myself.
The purpose of discretionary bonuses is to address imperfect (and potentially asymmetric) information about just how much you really are worth. It can be easier to assess post-hoc.
Whether it actually does this well is certainly an important question, as well as how it can be abused and how frequently that happens, but it seems remiss to rail against them without noting their intended purpose - which, in the abstract, seems entirely legitimate.
If I am not performing to expectations, fire me or renegotiate my salary. There are a great many ways to tune my compensation to my actual determined worth.
A discretionary bonus in this case is simply "you should take a below-market salary until we're convinced you're the real deal, and then maybe you will get the salary difference back". I'm not convinced anyone who isn't desperate will take this deal.
And having experienced the discretionary bonuses at two very large and well-known software companies, I am absolutely, completely, vehemently disinclined to ever enter into such an arrangement again.
For discretionary bonuses to make even the most remote amount of sense, it needs to offer the employee an upside for taking on the uncertainty.
"If I am not performing to expectations, fire me or renegotiate my salary."
Both of these are high overhead, which means harder to tune. Depending on circumstance, that may work to the advantage of the employer or employee, or to the advantage or disadvantage of both.
In principle it needn't require desperation, just confidence that your market salary should be above what you can demonstrate it should be during the interview process.
Again, I'm not speaking to actual practicality - I know in a limited fashion how it has and hasn't worked for me, where discretionary bonuses have occasionally been present but have generally not been a large part of my compensation; I don't have any particular insight into their function / misfunction broadly.
"For discretionary bonuses to make even the most remote amount of sense, it needs to offer the employee an upside for taking on the uncertainty."
Obviously.
Anyone saying "Base + max bonus gives the compensation you expect" is trying to take advantage. It should be "base + expected bonus is marginally higher than the fixed rate you would deserve if you are as good as you think".
Many companies give you a market rate and a bonus (sign on / stock RSU/ cash bonus etc) on top of it to incentivize extra work / ownership.
My case: my base salary is pretty competitive considering the market/location. I also get a stock award on top of that based on my future potential / current work etc. For me, the stock component has been a reasonable contributor to the final net take home.
Essentially: you work hard, you can potentially make 2x-3x your base and this multiplier only goes up as you go up levels.
I am not against discretionary bonuses like the above (obviously :). Come for the base, toil for the bonus.
This is definitely how it should be, the rule not the exception. It tends to seem like the exception in the places I've been exposed to. Its likely my choice centered around this area of the Atlanta suburbs that reinforces my perception.
If two people are both performing at about the same level, they can get the exact same bonus. In a ranked system one employee must get more than the other, even though their actual output is pretty close to identical.
Not to mention when you make the ratings tied to rewards, as opposed to punishments, you're removing a lot of politics. Stack ranking discourages high performers from working together, as their performance rating is penalized by their proximity to smart people. Because stack ranking is inherently punitive, this also makes these employees less mobile. So not only are you stuck in a team full of super-ninjas who make you look bad, but the stack rank you got makes you toxic when it comes to internal transfers.
A fixed bonus pool won't fix the "everyone near me is too smart" problem, but it at least would give people a way out to another team. An otherwise good employee who rolled the dice wrong when picking teams does not gain a permanent black mark for it.