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”].

Merit-money-mini-150This text is part of Merit Money, a Management 3.0 Workout article. Read more here.

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  • Vlad Didenko

    Great and timely – thank you! Often bonuses considered a tool in a whole array of compensation tools. I hope you will touch on mixing compensation tools for one’s income (unless I already missed it). Some of my experiences are here: , but it would be surprising to hear that KISS principle should not apply to human resources.

  • Riku Pulkkinen

    Great, straight to the point! Additionally, “pressurised targets” where the pressure is caused by bonus or by reporting make people react in three ways [Wheeler, Understanding Variation: The Key to Managing Chaos]:
    1. They can improve the system
    2. They can distort the system
    3. They can distort the data

  • BenLinders

    Thanks Jurgen, your blog again makes clear that Bonus Systems do not deliver what people expect from them.
    It’s good to know what doesn’t work. But are there also alternatives to motivate people that do work? And do we know why they work? That would be interesting!
    I do not have the anwers (yet). I read about thing like positive psychology, happiness and non-violent communication, appreciation, feedback and kudos, and self-organizing and autonomy, and I think that there are things in there that can help us to understand more about motivating people.

  • Jurgen Appelo

    Hi Ben,
    If you read the Merit Money article, referred to at the bottom, you will find a suggestion for a much better system!

  • Arran Hartgroves

    Hi Jurgen, have you read much on gamification? I tried to apply some of the high level concepts to Scrum in my blog, but I wonder if such concepts can be applied to appraisal systems as well? People could be rewarded with points against their attributes, and gain recognition through such mechanisms (you don’t level up a game character, but yourself). A healthy game like competitiveness might then then motivate. I’m imagining +1 people for their efforts!
    Being given recognition from your peers would probably be preferable to those getting recognition from “playing the promotion game”, and all rewards would be based on achievements (if you do nothing, you would get no recognition from peers). No regular reward.
    Attributes for recognition could be around behaviours that we desire. I would propose that some competition is not a bad thing, some very innovative companies foster healthy competition amongst teams (but those teams still are rewarded to collaborate at intervals to share key concepts). E.g. I share a key lesson learnt learnt to several areas in my department, I get points for collaboration, strategic thinking etc…
    When I play games, I’m challenged by complex tasks and take risks, but enjoy the time I spent playing, making I.T. more like this cant be a bad thing! (Although its a strange concept for now at least).

  • Jurgen Appelo

    I suggest you read the Merit Money article, referred to at the bottom of the post. It describes a solution using gamification.

  • BenLinders

    Thanks Jurgen, found it!
    I like how the Merit Money article emphasizes that bonuses should reward collaboration. And agree that feedback is crucial to increase performance in any situation, so it should be rewarded.

  • Stefan Haas

    D. Kahneman writes in his book ‘Thinking, fast and slow’ (p. 55f) about how exposing people subconsciously to money (priming) fosters individualism, selfishness and reluctance to be helpful. E.g. a group of people who were asked to form a phrase with theme ‘money’ preserve twice as long in solving a difficult problem before asking for help or pick up less pencils from the ground that the experimenter clumsily has dropped to the floor. I think any change in the compensation model will first have to deal with the fact that everyone is more concerned about money and thus experience similar effects as the psychological experiments Kahneman describes.

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