The Double-Edged Sword of Bonuses

November 30, 2011 - 5 minute read - Posted by

Yay, it’s bonus season! All employees are excited to get some extra cash that they can use to cover some of their expenses associated with the holiday season. Companies are also excited to give out bonuses to keep their people motivated. But bonuses are like a double-edged sword and they can be destructive to your employees’ motivation and you company culture. In this blog post, I’m going to explain why bonuses can be dangerous and how to avoid the painful mistakes that most companies are still making when it comes to giving out bonuses. Why can bonuses be damaging to the company? Doesn’t it make sense to pay people bonuses when they perform well as an incentive for them to perform even better? The mind-blowing truth is that recent research has unveiled some hidden complexities behind money and motivation that are not in alignment with the economic models: While not paying people enough money can be demotivating, once people are paid enough, higher money incentives lead to demotivate and lowered performance. If you want to learn more watch Dan Pink’s talk on motivation: The surprising truth of what motivates us or read Alfie Kohn’s book, Punished by Rewards, where they explains how rewards and bonuses can kill intrinsic motivation and lower performance levels.

The deadly mistake you can make when it comes to paying out bonuses is tying them to employee performance, in particular using performance reviews to assess how much bonus to pay each employee. The worst thing you can do is use traditional performance management software and 360-degree feedback processes to rate and rank employees and pay bonuses according to the results. This is the recipe for killing the intrinsic motivation of top-performers and disappointing the people that were rated as average performers since most people see themselves as top performers. Ratings and rankings are also damaging to your company culture as it introduces politics into your organization.

So now you know what not to do when it comes to bonuses, how can you pay bonuses that are motivating? There are three ways to achieve this:

  • Pay everyone the same bonus based on the company performance as a whole. For example, if the company has done well everyone gets a bigger bonus, and if the company hasn’t done well, everyone is given a reduced bonus.
  • Pay varying bonus based on seniority. For example, the more you have been with the company, the more bonus you are entitled too.
  • Combination of the two methods above

By decoupling bonuses from employee performance, the negative effects associated with bonuses and motivation can be avoided. Some HR experts such as Mary Jenkins suggest that it is okay to have exceptions for really high performing employees. I think that if an employee has gone really out of their way for an extended period of time, it is okay to pay them more bonus. But these are exceptions and you do not need a rating system to identify who these people; they usually shine.

In closing, paying bonuses to employees at the end of the year is a good way to thank employees for their contributions and to share some of the company’s generated wealth with them. However, caution must be made to not tie the bonus directly to employee performance as it may demotivate your employees and damage your company culture. Using rating and ranking tools to assess how much bonus an employee is entitled to is a bad industry practice that must be avoided. Keep everyone happy and motivated this holiday season by rewarding people based on the collective contributions of all employees, the company’s performance, and other factors that are not tied directly to their individual performance, such as seniority within the company.

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