Rethinking Bonuses

I’ve always had an issue with bonuses.

Whether I was on the receiving end of a bonus scheme or, on the implementation side of a bonus scheme. It didn’t matter whether I hit my bonus or not, I always felt like was being cheated somehow. If I reached the target and surpassed it, then I felt like I should have kept some in the bag for the next quarter. Or, it felt like I didn’t get paid enough. And, of course, not reaching my targets and missing my bonus was disappointing. I had done the same amount of work but sometimes there are factors that you can't account for.

Effort vs reward ratios always seemed a little inconsistent.

Calling it a bonus “scheme” makes them sound a little dodgy. But that’s precisely what they are - a scheme. Some will call it an Incentive Plan. We all know what they say about putting bows on turds. Call it anything you like, but pay-for-performance models are archaic.

To get the best out of people, we need to rethink bonuses. And so, rethink motivation.

Carrot & Stick Models aka Reward & Punishment
If you do x then you get a reward. But, If you don’t do x then you get punished.

Generally, organisations only see one side to the bonus incentive structure. Dangle a big juicy carrot, and if the employee hits the target, they get said carrot. But, what is rarely thought about is what if they don’t hit the target? It’s obvious - they don’t get the carrot. Which is then the punishment for not doing something.

Rewards for work done narrow focus and concentrate the mind on specific tasks. For certain roles in a business, bonuses can work well. Task-based or numbers-based roles can work with incentives. Generally, if you can attribute one input source with one outcome you can incentivise achievements with a reward. Sales, Ops, and sometimes Support teams are examples where bonuses can work.

Pay for Performance Models - Extrinsic Motivation
So, why were bonuses created in the first place? It stems back to the Industrial Revolution. Factory workers had to perform the same task for hours on end, day after day. The desired outcomes were binary. Every business was a production line, which meant efficiency and output were paramount.

Today, we create most bonus schemes to motivate employees to strive for a goal. But, I would argue that pay-for-performance systems actually undermine motivation.In fact, pay-for-performance has only been shown to work when employees are doing simple, repetitive tasks. When you want to prioritise short vs. long-term gains. When quantity is more important than quality. Self-determination theory has shown that extrinsic motivation makes employees less engaged, less persistent, less curious, less proactive, less creative and less flexible.

Let’s not ignore that many bonus schemes can (and probably will) be cheated. So, then you need adequate safeguards to prevent cheating and abuse. Then you’re setting up systems to make sure people aren’t cheating the system to get bigger bonuses. And, then someone has to monitor that system.

Hmmm... You don’t see people needing to cheat on personal growth and development.

Dan Ariely did a study at MIT on performance and reward systems. This is an excerpt from the study. “If the task involved mechanical skill then bonuses worked as expected. But, once the task required even rudimentary cognitive skill, larger rewards led to poorer performance.”The same MIT students decided to conduct the exact same experiment in India to remove any cultural bias or variables. The students found almost identical results.

The London School of Economics also did a study on Paid Performance Programs at 51 companies. Here’s an excerpt from their review. “We found that financial incentives have an overall negative impact on performance.”

So, can we have rewards without punishment? If this isn’t the right model what is?

Intrinsic Motivation
Does a bonus really incentivise the desired outcome? If someone is halfway through the month and they’re nowhere near their target, t they will lose motivation. This is a fact. Why continue to work when you know you’re not getting the carrot? Yet, if the incentive is not a tangible number but rather internally driven. Then, motivation is consistent and almost never-ending.

It seems to me that we need to focus on intrinsic motivators.

• You like something

• You’re good at something

• It’s important to the greater “whole”

• It aligns with your needs and values

I’ve built a few Customer Success departments and advised many companies on how to build them. One question that often comes up is “how do we motivate our Customer Success Managers? How do we tie their work to a bonus structure?”

My answer is always the same.

“Your CSMs deal with your biggest clients. That’s hundreds of thousands of dollars in revenue they hold in their collective hands. If you can trust them with this, why do you feel the need to incentivise them with bonuses to make sure they achieve outcomes?”

What is the perfect operating system for management AND motivation?
Autonomy - people want to direct themselves
Mastery - people have a desire to get better at something
Purpose - people want to do something in service of a vision larger than themselves

It seems simple to me. Pay people adequately and fairly. Get the issue of finances off the table quickly! Then give people autonomy to do their own thing. And, get out of their way!

This is a very divisive topic and many CEOs & executives battle with it. I’d love to hear your opinion, drop a comment below or email me your thoughts.

Peace, love and growth.
Jarren

Additional reading on the topic of bonuses and rewards

• Punished by Rewards - Alfie KohnThe Trouble with Gold Stars, incentive plans, A's, praise and other bribes.

• Drive - Daniel H. PinkThe surprising truth behind what motivates us.

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