Sense and non-sense of exorbitant financial incentives.

The annual performance reviews are behind us and many C-level executives, salespersons, accountants and senior managers have claimed their yearly bonus. What a waste of money! Research shows that there are at least three reasons why bonuses don’t produce the anticipated effect.

1. Bonuses have a negative effect on intrinsic motivation.

Imagine a passionate individual who has been working for years to eradicate poverty from the face of the earth, in exchange for a small fee. Suppose this individual would suddenly receive a hefty salary for his work. This could be a good way of killing his passion and involvement in the good cause.

This can be explained by a phenomenon called ‘over justification’. When someone receives a good salary or is otherwise very well compensated for their efforts, they unconsciously conclude that their internal motives are weak. “If I do it for the money, than I’m probably not doing it because I like the job”.

As a consequence they are less engaged and don’t find their job especially enjoyable.

This only occurs when people know up front that they get rewarded. An unexpected reward (or bonus) does the opposite; it motivates them and enthuses them.

2. Bonuses increase risk taking.

Ok, you’re a sales person. Your target is 30 sales this month and there are only two days left. You’ve sold 22 thus far. You have 4 clients in the pipeline and on the verge of signing. When you focus entirely on them it probably is a done deal. The other possibility is that you approach 20 new prospects. In the past this resulted in an average of 2 to 8 sales. What would you do?

Most people who where asked this question choose the uncertain strategy and went for the 8 possible sales. When not confronted with the target of 30 sales they would have chosen otherwise; only 46% would have chosen for the uncertain approach, all others choose the certainty of closing those 4 sales.

Now why is that? People look differently to profit as they look to loss. I you have the choice between the certainty of getting $50 or choosing heads or tails with the possibility of getting $100, than most of us would go for the $50. In case of a loss however, the opposite happens; we rather choose for the uncertainty of a 50-50 chance of loosing $100 or $0, than for the certainty of loosing $50.

Setting a target works pretty much the same. When the target is set at 30 and your at 22 than those 4 certain sales or not regarded as profit but as a loss of 4 in reaching your target. When you’re focused on the target any result below 30 is seen as a loss. Without the target those 4 sales would be seen as a profit.

Promising a bonus when reaching a target is a certain way of making people take risks that they otherwise would never dream of taking. The recent history has certainly proven this.

3. Bonuses encourage anti-social behaviour.

By promising a bonus the focus might shift from the job itself to the financial compensation earned by it. We all know the story of Ebenezer Scrooge, which is a perfect example, but it has also been scientifically proven: thinking about money makes people less socially involved.

It doesn’t matter whether you’re thinking about too much money (what should I do with it?) or having not enough money (can I make my mortgage payment this month?). People who just thought about financial issues are less inclined to help others or sympathise with their problems. They are less able to remember faces or names of people they just met, nor remember details from a conversation they just had. They literately keep a bit more distance from other people. And if they were asked to choose between two chores, they would choose for the one that allows them to work solo in stead of working in a team. Apparently money makes people self-sufficient; I have enough to worry about and don’t need to be bothered by anyone else.

It might well be that our body houses two people: an economist and a sociable. The economist is rational and calculating. He buys the train ticket because the fine multiplied by the odds of getting caught is higher than the price of a ticket. The sociable buys a ticket because it’s the honest thing to do. The ultimate sociable would even buy a ticket if there were no one to check it! The sociable doesn’t think about the money, he pays for the fare, because it’s the decent thing to do.

We all have an economist and a sociable inside of us. Sometimes the economist rules, sometimes the sociable wins. But employers who introduced a bonus culture in their company have thus created a culture of calculating employees who think of themselves first and foremost.

Bonuses and targets only work for simple, repetitive tasks when it’s easy to increaseproductivity by working a bit harder and make an extra effort. Like with an American fast-food company where bonuses increased profits, shortened waiting time for customers and increased employee loyalty and satisfaction, mostly low paid jobs with little educational requirements.

But that’s not where the real money ends up, that’s with the highly paid, highly educated jobs where the financial benefits don’t produce the desired effects at all.

In my view bonuses are insults. What the boss really says by promising a hefty bonus, is that he doesn’t trust the employee to do what he is hired to do and doesn’t expect the employee to give it their full 100% unless he makes it a little more interesting. If that’s not an insult, I don’t know what is!

What does work?

Here are some tips to get started right away:

Feed the ego: make compliments and give kudos about a job well done in the presence of co-workers.
Give constructive and honest feedback on a regular basis, not just once a year during performance reviews (that’s so 2011).
Stimulate intrinsic motivation: allow people to get involved in policy making and decision taking, allow them to have a say in how their job should be done and how their team should reached the goals. Get them involved and make them co-creators and thus, co-responsible and accountable for the outcome.
A little knowledge of psychology could do a lot of good among the C-suits. If they are willing to turn that knowledge to good use is an entirely different issue. Presented with the outcomes of his research, Dan Ariely explained to executives in the banking industry that while bonuses do increase the efforts, it decreases the quality of the efforts, they responded that his research certainly wasn’t valid for their industry…..

Maybe that’s why I like to coach the ‘Next generation of Global Corporate Leaders’. This current generation is too much focused on ‘having’ instead of ‘being’, in that respect a lost generation. I’m just waiting for the ‘next generation’ CEO to stand up, eradicate the bonus culture, and starts creating a more sociable and thus more profitable corporate culture.

If you want to know more about increasing the engagement ratio of your employees and changing the bonus culture in your company while winning the hearts (and wallets) of your shareholders, just drop me a line; I’m ready and won’t ask for a bonus!

Author's Bio: 

Ton de Graaf is one of the very few coaches in the world who is designated by the Worldwide Association of Business Coaches as a Chartered Business Coach™ (ChBC™) after a vigorous and independent assessment conducted by the Middlesex University and the Professional Development Foundation in the UK.

Business coaches at this level are accountable for critical analysis, diagnosis, design, planning, execution and evaluation. They exercise substantial personal autonomy and show significant influence and leadership within their organization, the profession or academic settings. Chartered status tells the wider community that a business coach has the highest level of specialized subject knowledge and professional competence.