Despite HR’s progress in lots of other areas in reward, getting rid of bonuses has proved almost impossible. I think that’s because we, and our leaders, cling onto a number of myths that have proved hard to shake. This blog tries to bust those myths and to give you the ammo you’ll need if you want to fight this particular battle!
Myth 1. Financial Incentives improve performance
Probably one of the strongest of the deeply held beliefs in corporate life! We still firmly believe that if the financial carrot is big enough, we can deliver superior performance from its potential recipients.
Where did this myth come from?
In the 40’s and 50’s various psychologist and researchers were promoting what’s known as Behaviourist Theory. This was largely developed through observation of animals in labs but amazingly still dominates our views on financial rewards today – 70, 80 years on and very little has changed.
Behaviourist theory is very simple; it says our behaviour is determined by the consequences of it. So, if we do something and get a reward, we will do more of it. You can see where bonuses fit in here.
In the 70’s and 80’s corporations became obsessed with making sure we got the rewards/incentives right. The thinking seemed to be: Get the incentives right, and people will be motivated to perform better, resulting in better performance for the company. And despite the bad press and public uproar that big pay-outs generated in the wake of the financial crisis, when many top executives had been heavily rewarded for short-term performances that ultimately proved disastrous, the system marches on.
And so, we spend countless hours focusing on how to structure our bonus schemes. But rarely do we ask ourselves the question that challenges the principle on which bonuses are created, namely, do financial incentives actually improve performance?
Incentivised performance improvement is temporary
Interestingly, research suggests that, by and large, rewards succeed at securing one thing only: temporary compliance. When it comes to producing lasting change in attitudes and behaviour, however, rewards are strikingly ineffective. Once the rewards run out, people revert to their old behaviours. Studies showed that offering incentives for losing weight, quitting smoking or using seat belts, for example, is not only less effective than other strategies but often proves worse than doing nothing at all. Incentives do not alter the attitudes that underlie our behaviours. They do not create an enduring commitment to any value or action. As for productivity, at least two dozen studies over the last three decades have conclusively shown that people who expect to receive a reward for completing a task or for doing that task successfully simply do not perform as well as those who expect no reward at all.
In fact, if you introduce financial incentives where people were previously engaged in their work and doing well, their performance will get worse! In other words, if someone is internally motivated to do a thing, and then you tell them you will give them a bonus for doing that thing, they will lose their internal motivation to do the thing.
So, you get better performance from finding ways to engage people in what they are doing – making the work interesting, giving people the space to do the job their own way, ensuring you are playing to peoples’ strengths and so on.
Dangling a financial carrot can lead to a temporary uplift, but it won’t last – and worse, by introducing external, financial incentives, you actually destroy the motivation that was there without it.
Myth #2. They help manage costs
This myth is often thrown at HR leaders who are progressive enough to try and change their leaders’ addiction to bonuses. And, as with all enduring myths, there is a small element of truth in them. In theory, bonuses do give you greater control of pay variability. But unfortunately, in practice, most of us work on the basis of on target earnings (OTE), ie: what you would expect to receive in a normal year, and our typical bonus becomes an expected part of our annual salary. Not paying that expected bonus becomes very tough without a huge fall in motivation.
Finance teams know this and tend to always accrue the same amount for bonus payments each year (c85% of bonus pot). So, it’s not clear how the bonus is all that variable in terms of the accounts and in reality?
Also, most companies continue to pay out regardless of the levels of performance. Paying for under-performance remains the norm. In a recent study almost half (45%) of senior managers and directors whose performance was rated as “not meeting expectations” received a financial bonus and almost one-third (30%) of UK managers whose performance was ranked as under-performing were paid a bonus in 2015.
So, we’re typically paying the same amount out each year and we’re giving it to under-performers as well as the rest. Not the best advert for cost control?
Myth #3: Everyone wants more money
We all need to pay our bills and provide for our families, but once these basic needs are covered there is a lot of evidence to suggest that more money doesn’t actually make us any happier. Or, as Arnold Schwarzenegger once stated: “Money doesn’t make you happy. I now have $50 million but I was just as happy when I had $48 million.”! Daniel Kahneman and Angus Deaton reported that, in the U.S., emotional well-being levels increase with salary levels up to a salary of $75,000, but that they plateau afterwards. So, enough money makes you happy, but lots of money doesn’t make you any happier.
People care more about other things
Our bonus systems are based on the myth that money is what everybody wants and that if we get it, we will have happier and more engaged employees. Indeed, several studies over the last few decades have found that when people are asked to guess what matters to their co-workers, or, in the case of managers, to their teams, they assume money heads the list. But put the question directly; “What do you care about?” and money typically ranks only fifth or sixth. Dan Pink’s research has led him to conclude that whilst being paid enough is very important, once people perceive that they are paid fairly, then they become much more motivated by intrinsic elements. Once people are paid fairly, they look for more from their work.
It’s easier to pay a bonus than work out what they really value
So, why do we continue to believe that our people are only interested in more money? Maybe, in part, it’s because money can represent many different things that many of us do want, such as power, freedom, security, appreciation, etc. Giving money is an easy ‘catch-all’ and much simpler than trying to really get to what each of the individuals in our team really value. As was noted in this HBR article back in 1993, (my God, was that really 27 years ago?!) ‘Managers often use incentives as a substitute for giving workers what they need to do a good job. Treating workers well—providing useful feedback, social support, and the room for self-determination—is the essence of good management. On the other hand, dangling a bonus in front of employees and waiting for the results requires much less effort.’
Smarter companies are spending the time and effort to understand what their individual employees value, what makes them feel appreciated through interventions like stay interviews. They are trying to provide choices that meet those needs, rather than throwing money at them and expecting their motivation and productivity to rise.
Myth #4 We need bonuses to be competitive
‘We have to pay them because everyone else does’ is a fairly common refrain. And this is certainly true if your attraction strategy is to be exactly the same as your competitors! But why wouldn’t you want to be a pioneer in your market? Why wouldn’t you do what’s right for your people and your culture and make this a USP of your employment brand?
Moreover, wouldn’t the following statistics give you some confidence to focus on other things other than a hefty bonus?
The bonus is rarely the thing that makes you a fantastic place to work.
Myth #5: They focus people on the ‘right’ things
As with the first myth around incentives improving performance, this one has real longevity. But it feels relevant to another age when we had annual business plans that made sense, not the disrupted agile world we inhabit now. Trying to record and maintain a rigorous focus on objectives 12 months out from bonus pay day is just nonsensical. We need our people to be responsive to the fast-changing demands of our markets, our customers, etc. We may want them to change their focus several times in the year.
There can also be some negative consequences from our incentive schemes as people start to focus on the ways they can increase their bonus, sometimes at the expense of right thing for the business.
Bonuses discourage risk-taking
“People will do precisely what they are asked to do if the reward is significant,” said an early proponent of pay for performance programmes, Monroe J. Haegele. And of course, this is precisely the problem! By focusing on their bonus, people can become less inclined to take risks or explore possibilities, to get creative or try something new.
Bonuses destroy collaboration
One of the best ways of destroying collaboration is to force people to compete for rewards or recognition or to rank them against each other. For each person who wins, there are many others who carry with them the feeling of having lost. And why would you share your ideas, support a colleague or miss out on a sale that negatively impacts customer retention, if your bonus is dependent on hitting individual targets?
Bonuses can destroy ethics
Several years ago, Green Giant, a unit of General Mills, had a problem at one of its plants: Frozen peas were being packaged with insect parts. Hoping to improve product quality and cleanliness, managers designed an incentive scheme in which employees received a bonus for finding insect parts. Employees responded by bringing insect parts from home, planting them in frozen pea packages and then “finding” them to earn the bonus. A small example but one that points to a more fundamental problem. Incentives might mean you hit your targets, but they don’t guarantee that employees will earn them by following the most moral or ethical paths. There are many studies that point to the ways that a focus on achieving bonus has led to questionable behaviour in business.
These myths endure because we have believed them for so long, we’ve built our performance and reward structures around them and we have all believed them – so they must be right, mustn’t they? And yet the evidence is there, and has been for years, to show that these myths should be challenged. The financial crisis made them wobble a bit, but they didn’t collapse. Maybe now is the time, with our desire to create something truly better as a result of the current crisis , for us to finally bust them for good?
Duration: 27 minutes Lucy talks to Founder of Wow Accountants, Paul Bulpitt, about how to ensure your people live up to your brand.