Do You Want Your Peers to Set Your Bonus?

Rachel Silverman of the Wall Street Journal writes today about an interesting new human resources strategy being employed by several firms.  These companies have given employees the opportunity to determine the bonus compensation of their colleagues.  Here's how it works:

Coffee & Power, a San Francisco odd-jobs start-up, granted each of its 15 full- and part-time employees 1,200 stock options this past January, to distribute among co-workers in whatever way they chose. A worker can plunk all his options onto one colleague or split them among the group, so individual bonuses are tied to how co-workers perceive each other's work."  It lets me reward people that management may not always recognize," says Becky Neil, who works in marketing and product management. "This person who has a big title—maybe he didn't actually contribute that much."  Exchanges like those at Coffee & Power make the labor market of an individual office fluid, crowd-sourced and open to constant feedback. Allowing employees to vote on one another's performances also holds workers accountable and raises the stakes for those who don't contribute, managers say. On the flip side, there is a chance these markets could devolve into popularity contests, or lead to hard feelings among those who aren't recognized by the group.

Some companies have experimented with this type of process, though they haven't actually based compensation on the employee input.  Instead, companies such as At HCL Technologies of India have provided workers virtual currency to allocate among their peers.  The imaginary currency allocation is then used to determine how to provide recognition to excellent performers, though it does not translate directly into changes in compensation. 

I think the notion certainly is quite interesting, and I'm intrigued to learn more about firms trying to implement such systems.  I would offer one additional word of caution not cited in the article though.  Such a system may be effective in a small start-up, in which everyone knows what others are doing.  It may be more problematic in a larger, more complex organization in which individuals do not have an accurate understanding of their peers' contribution to the organization.  In those instances, giving employees an opportunity to rate their peers in this manner may lead to erroneous conclusions... and then hard feelings and other negative consequences.