The Bonus System

A practice that has infiltrated the western business world like a pestilence in a shanty town is the annual bonus system. The idea of this practice is that managers give workers targets, and calculate annual bonuses which usually depend on people’s performance ratings, job position, salary, overtime, age, shoe size, and a host of other variables. The common rationale behind the bonus system is to incentivize performance. But actually, it stinks.

Decades of research has confirmed, again and again, that bonus systems rarely have a positive effect on people’s performance when they are involved in creative knowledge work [Pink, Drive] [Kohn, Punished By Rewards]. On the contrary, the effect is just as likely to be negative [Fleming, “The Bonus Myth”] [Spolsky, “Incentive Pay Considered Harmful”]. There is so much wrong with traditional incentive programs, it is impossible to list all their problems. But I feel incentivized to give you the most important ones here:

1. People get addicted to regular rewards, and if they don’t get their anticipated reward, they will feel disappointed or punished. This ultimately destroys motivation and thus performance. [Kohn] [Pink]
2. Individual rewards disrupt collaboration, which is crucial in creative knowledge work. It stimulates competition and cheating, which destroys relationships between workers, and also between workers and their managers. [Kohn] [Fleming] [Pink]
3. Traditional bonus systems rely on objective measures, but reality is far too complex to capture in numbers. The metrics ignore the soft side of great performance, including teamwork and collaboration. [Kohn] [Spolsky].
4. Research shows that rewards distract people from complex work, disrupt creative thinking, and increase people’s stress levels. This causes them to play safe and prefer easy tasks, while innovation requires the opposite: taking risks and doing complex tasks. [Kohn] [Fleming] [Pink].
5. The research also shows that bonuses undermine intrinsic motivation and altruism. As soon as rewards are handed out people start to think, “They pay me extra for this work thus it cannot be fun, interesting, or good.” [Kohn] [Fleming] [Pink]

It should also be noted that bonus systems are usually based on company profits. But most workers cannot directly relate their work to their company’s profits, because most of what influences profits is beyond their own control [Bomann, “Bonus Schemes Should Be Handled with Care”].

This text is part of Merit Money, a Management 3.0 Workout article. Read more here.

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