Bonus Theater
When Performance Ratings Become Currency
Annual bonus distribution tied to performance ratings isn’t broken by accident. It’s a shell game designed to look like merit while functioning as management discretion with extra steps.
I’ve watched this pattern repeat across companies for over a decade. Merit increase pools dry up. Managers still need to retain people or reward work. So they inflate performance ratings to move money through the bonus channel instead. A “Far Exceeded” rating stops being about performance and becomes about compensation strategy.
The mechanism is simple. Most companies tie bonus percentages to rating tiers:
Meets: 5-8% bonus
Exceeds: 10-15% bonus
Far Exceeds: 18-25% bonus
When merit budgets get constrained to 2-3%, suddenly every manager discovers that half their team “far exceeded” expectations this year. Not because performance improved. Because the rating became the only lever left to move money.
The Qualification Problem
Nobody is equipped to challenge these ratings. The criteria for “Far Exceeded” is typically vague: “Consistently delivers exceptional results beyond role expectations.”
What does that mean? Anything the manager can write a paragraph about. And any manager can write a compelling paragraph about almost anyone.
Watch what happens in calibration meetings:
Manager A: “This person far exceeded this year. They rebuilt our client portal.”
Manager B: “That was in their job description though.”
Manager A: “They did it three months early and reduced customer complaints by 80%.”
Manager B: Silence. Because who’s going to argue with that?
But here’s what nobody asks: Did this person actually far exceed expectations, or did their manager just learn how to describe normal excellent work using superlatives?
The system creates no way to tell the difference. There’s no objective standard. No independent verification. No expertise required to make the assessment. Just a manager’s ability to build a case, and a committee’s willingness to accept it.
The Manipulation Cascade
When ratings become compensation tools instead of performance assessments, the whole system collapses:
The inflation problem: If everyone can be rated “Far Exceeded” with the right paragraph, then nobody is actually far exceeding anything. The rating stops measuring performance and starts measuring manager advocacy skills.
The credibility erosion: Employees watch someone get “Far Exceeded” for work that looks identical to work that got someone else “Exceeded” last year. They learn the rating is arbitrary. They stop trusting the system.
The expectation spiral: This year’s “Far Exceeded” becomes next year’s baseline. Rating someone lower after a Far Exceeded triggers a difficult conversation nobody wants to have. So ratings can only go up or stay flat. The rating scale loses meaning.
The quiet mediocrity: The easiest people to rate as Far Exceeded are the ones who don’t threaten anyone. The ones who make managers comfortable. The ones who hit their numbers without making leadership nervous. Meanwhile, the people who actually push boundaries, who take risks, who challenge broken systems—they’re “difficult to rate” because their impact is harder to defend in a paragraph.
What Actually Happens
A manager needs to get someone more money. The merit pool is 2%. On a mid-range salary, that 2% lands somewhere around $1,900 a year. $158 a month before taxes.
So the manager runs the bonus math instead:
Exceeds (12% bonus): $11,400 one-time
Far Exceeds (22% bonus): $20,900 one-time
The difference is $9,500. To get that same money through merit increases would require budget approval from three levels up and trigger equity reviews across the entire team.
Or the manager can just write a better performance rating paragraph. Same money, zero scrutiny.
So that’s what happens. The rating gets inflated. The bonus gets paid. The employee gets their money. And nobody admits that the “Far Exceeded” rating was a compensation vehicle, not a performance assessment.
The Second-Order Costs
This manipulation creates damage beyond just rating inflation:
Loss of signal: When ratings become negotiable, the ability to identify actual high performers disappears. The data becomes meaningless. It can’t be used for succession planning, promotion decisions, or talent development because it’s been corrupted by compensation strategy.
Manager skill atrophy: Instead of learning to develop people or have difficult performance conversations, managers learn to game rating language. They get good at writing compelling paragraphs, not at building high-performing teams.
Expectation confusion: Employees don’t know what excellence actually looks like because the rating system doesn’t reflect it. They learn to optimize for whatever gets rated highly, which might have nothing to do with what the organization actually needs.
Trust destruction: Once employees figure out the game—and they always do—they stop believing anything leadership says about performance, merit, or fairness. The cynicism spreads.
The Real Problem
The bonus distribution system isn’t broken because ratings are subjective. It’s broken because we’re using performance ratings to solve a compensation flexibility problem.
Companies want to reward people differentially without committing to permanent salary increases. They want discretion to move money around based on business needs, retention risks, and manager judgment. But they can’t admit that’s what they’re doing because it would expose how arbitrary the whole system is.
So they wrap it in performance language. They create rating tiers and calibration processes and documentation requirements. They build elaborate theater around “objective assessment” and “consistent standards” and “fair evaluation.”
But underneath, it’s just managers trying to get people money using the only lever they have left. And that lever happens to be a performance rating system that was never designed to be a compensation tool.
The Other Side of the Coin
But here’s what makes this even worse: Rating inflation isn’t the only way the system breaks.
While some managers are inflating ratings to move money, other managers are being forced to deflate ratings to fit distribution requirements. Bell curves that demand “only 10% can exceed expectations” regardless of actual team performance.
Ratings gaming upward to solve compensation problems. Ratings forced downward to solve distribution problems. The same rating system. The same performance categories. Completely opposite manipulations.
Which means the rating has stopped meaning anything at all.
It’s not measuring performance. It’s measuring manager strategy, organizational constraints, and compensation politics. The number in someone’s file tells them nothing about their actual work and everything about the games being played around them.
What It Should Be
If bonuses are going to stay tied to ratings, the industry needs to admit what’s actually happening: managers are being given discretion to distribute money based on their judgment.
That’s fine. But it should be honest. Stop pretending there’s an objective standard for “Far Exceeded.” Stop calibrating ratings as if there’s a scientific method. Stop documenting cases as if they prove something.
The simpler version: Give managers a bonus pool and let them distribute it. Their decision. Their accountability. Their justification to their team.
No ratings required. No paragraphs. No cases. Just “Here’s your bonus. Here’s why. Here’s what I expect next year.”
At least then it’s honest about what the system actually is: manager discretion over compensation. Not performance management. Not merit recognition. Just money distribution based on human judgment.
Because that’s what it’s always been. It just got dressed up in performance language to make it feel fair.
It isn’t. And everyone knows it.
The only question is whether anyone’s ready to stop pretending otherwise.
Next in this series: "The Bell Curve Trap" - What happens when you build a high-performing team and the organization forces you to rate 90% of them as "meeting expectations."