"For every complex problem there is an answer that is clear, simple, and wrong." -…
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:
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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