Bonuses have been proven to be ineffective except in specific cases. So why do we keep using them, and should we stop completely?
If bonuses are assigned subjectively, they will inevitably lead to discouraging comparisons.
A while ago, I was working for a consulting firm. At the start of each year, we were given a target bonus. The theory was that if we performed well and did all the things we were expected to do, we would receive this target bonus. At the end of the year, I was told that I was going to receive 150% of my target. Wow, not only had I managed to hit the target and do everything expected of me, I was actually going to receive an extra 50% of this target. Pretty generous and very motivating, you might think.
Now there were three of us, me, Dave and Mike, who all joined the company at the same time and were deemed to be at the same level, so I popped round to Mike's office to see what he had got. Mike, like me, was pretty happy with his 120% of target bonus. That is until he found out I had received 150%. Immediately he felt like he'd been unfairly treated. At this point, I was still quite happy. Maybe even slightly happier knowing I had received more than Mike, if I'm honest. That is, until Paul popped in to see me. Paul had received 180% of his target. Now I was down with Mike considering my options, should I complain, leave, or just not work so hard?
Looking back, none of us could focus then on the fact that we had, indeed, gotten bonuses. All of which were above expectations. Instead, we kept comparing what we had each gotten and felt the distribution was unfair.
The fact is that, in 90% of cases, bonuses just don't work. According to Forbes, motivation in the workplace is quite a complex thing. So much so that if someone likes a task but is given a monetary reward for completing it, over time, they will lose that enjoyment. So, why are we still using them? Should bonuses be completely eradicated?
How Do You Measure Performance?
When we received the bonuses I mentioned above, my colleagues and I couldn't help but wonder what judgements our managers had made to decide how much each would get. I had worked harder than both of them, yet my compensation was lower than my colleague's. Why?
Well, that's the main thing about bonuses; they are usually based on subjective perception, which is simply impossible to measure. In this case, we didn't care much about the actual money; all we cared about was the fact that we had been judged - and given a second place compared to someone else.
Now, problems like this don't disappear either if you just give everyone involved with a company a share of the profits, either. Believe me; I tried it! I came up with this precise formula to share profits with the whole Company. We were giving away 10% of our profit, so there was a big cost to doing this. In the first year, each employee received around £1,100. Everyone was pleased about it. The second year, the sum went up to £1,400 - and the happiness continued, although it had waned slightly now people had come to expect a bonus. But in the third year even though the business had done well, profits were lower due to the heavy investment we'd made in hiring staff and growing new markets and the bonus this time was £700. Everyone was miserable!
For two years, the outcome had been highly positive. In year three, it turned into something with a negative effect (in balance, much worse than what we had gained by receiving the bonuses the first two years). Profits fluctuate, and bonuses that are calculated based on them will, too. They cannot always keep going up forever.
So, what happened here was that people appreciated the bonus at first, but ultimately the whole psychology of it became demotivating. Do you think this was a good idea, to begin with? My conclusion was that it wasn't.
Rewards Can Also Decrease Motivation
People are complex, so rewards can have a very subtle effect we cannot always anticipate. Let's look at another example that illustrates how variable pay can actually decrease motivation.
I was working as an actuarial student doing long hours. Not just me but our whole team; we would work from 8 am to 7 pm, staying late almost every evening. I'd wake up at 5 am, go for a run, study for my actuarial qualification until 7:30 and then go to work. But I was happy doing that because I thought I had a cause towards which I was working. My effort (our effort) felt good for the business and great for our careers.
At some point, the company decided this was too much to ask from students, so we were told that we were going to get overtime at the standard rate. My salary then was about £20,000 a year, about £10 an hour. Guess what happened? Once we found out that's what we were valued at, almost all of us decided it wasn't worth putting in the extra hours.
When the company put a price on our time, we just lost interest. Before, we felt we were doing it for the good of the business and the good of our careers. But when that effort turned into a pound amount, we thought: Actually, we'd rather just have the time and not work so hard.
In this case, instead of encouraging us to work, this paid overtime discouraged us from doing so. Which is interesting and not something you would easily anticipate, right? The idea that monetary compensation could have a detrimental effect was a controversial idea when it was first brought up in the 1970s, but hundreds of studies have proven it correct since then.
When Do Bonuses Actually Work?
There is a circumstance when a bonus can work, and that's when it's constructed as a formulaic addition that is based on specific metrics. For example, when compensation is given for a job where performance can be measured and is relevant.
The most common version of this is a salesperson's bonus. Salespeople work on commission, so if they sell more, they make more. Simple. This is an understood fact, and it works because it motivates people to work harder. It gives them a driver to do a specific thing, and when the bonus is assigned, there are no subjective parameters that can create tensions between employees.
Similarly, there are other ways of incentivising people using bonuses that use measurable metrics. For instance, when you pay someone for piece work, or you pay by unit. Of course, you don't always want someone to go around working as fast as possible so they can get home earlier. But at least the bonuses relate to the units, so they don't generate problems like the ones we saw above.
Bonuses don't need to become instantly banned but rather be applied in specific circumstances - for example, when the amount someone receives can be easily measured and justified.
If someone enjoys doing something, using bonuses is one of the best ways in which you can actually demotivate them. This has been long proven and will continue to be true no matter how the workplace changes. Sometimes, it's better to recognise when someone's doing something right and give them positive feedback instead (younger employees actually appreciate recognition more than monetary rewards).
So, to sum up: Bonuses can work in some circumstances. However, in the majority of cases, paying them is something seen as highly subjective. And, more importantly, something that can do more damage than good.