Think of the best reward you were ever given at work. Actually, think of the best reward you were given anywhere. I was recently hosting a panel of seven business leaders and posed that question to them. This is what they said:

  1. Time off.
  2. The chance to learn something that was not directly linked to my job.
  3. A hand-written note from my busy boss.
  4. The opportunity to give something back through working with a charity.
  5. A life changing bonus.
  6. A personalised gift.
  7. A peer-nominated award recognising me for the work I’d done.

What struck me from their responses, apart from the variety, is that most of their rewards shared three things, namely; they were:

And yet, when you consider the approach that most companies take to reward, we typically choose a bonus scheme linked to dubious performance ratings. Our bonus schemes have none of these features. They are expected – often leading to a sense of entitlement (“I got xx last year so I expect the same in this”). They are depersonalised and lack any recognition of what they need, want or value, the assumption underpinning them being that money is the great motivator. And whilst they may be accompanied by a letter from their boss, the scheme itself is managed across the company and lacks the sense of intimacy that great gifts have.

Like many HR professionals, I have spent countless hours trying to perfect the bonus scheme. Trying to strike the right balance between base pay and discretionary reward. Trying to find ways of rewarding the right behaviours through a combination of group, department and personal elements. Trying to make it achievable and stretching at the same time, etc. Despite all this effort, I can honestly say that I have never introduced a bonus scheme that made people feel good about working there. Often quite the opposite. So why do we spend millions on creating a reward that has the same impact as the annual Amazon voucher from your Gran?

Well, usually for good and valid reasons. These are the typical explanations:

“We don’t trust managers to do reward properly so we have to have a scheme”

“Bonuses enable us to pay for performance”

“We are a large complex organisation so we have to have one size fits all”

Whilst there may be some truth behind these, I suspect that in the end, it’s just easier. It’s easier to give out a bonus than to do something thoughtful and personalised and outside of a structured scheme. Moreover, we’ve seen money as the great motivator for so long, we have stopped looking for better ways to reward our people – ways that are based on a real understanding of their different needs and desires.

Excitingly, there are companies who are doing it differently. These companies are rejecting the traditional bonus scheme in favour of reward practices that are based on a different set of assumptions, namely:

Here are my top tips for designing an approach to reward that makes your people feel – well, rewarded.

Get the issue of money off the table.

Companies such as Netflix and Atlassian have been doing this for a while. Echoing the messages from Dan Pink’s book on motivation they aim to get the issue of money off the table by not paying bonuses and instead putting all of the expense into bigger salaries to “give people freedom to spend their salaries as they think best.” The inadequacies of using money to motivate is a huge topic in its own right and not the focus of this blog but there’s more about that subject here.

Reward the team not the individual

In Margaret Heffernan’s brilliant book “Wilful Blindness” she dedicates the whole of Chapter 10 to the problems with bonuses and their negative effects. One of the key issues she raises and backs up with extensive research is the role that individual bonuses play in destroying a culture of collaboration and teamwork. Given that most companies I meet cite collaboration and breaking down silos amongst their main priorities, maintaining a reward structure that encourages selfishness and individual over team effort seems counterintuitive. One example of a different approach comes from TINT a US social-media company who got rid of individual sales commission. They recognised that the sale process is a complex one, involving several different employees in the customer lifecycle (including marketing lead-generation, account managers, developers solving bugs, ongoing customer support) and that paying sales people differently to the rest of the organisation is divisive. They wanted to weed out selfish behaviour and encourage true collaboration and their solution was to replace individual commissions with a monthly team bonus to reward everyone who touches the customer, with a transparent (if complicated) calculation to ensure that pay is distributed fairly.

Reward each other

Most reward schemes follow a traditional parent/child philosophy where the company/boss (the “parent”) rewards the employee (“the child”). Where the reward is given from one human being to another this can still have a positive impact but too often the reward or bonus seems to come from some anonymous company source or HR. Companies are beginning to experiment with encouraging and trusting employees to reward each other – adult to adult. I like what Next Jump have done with their reward structure. They run monthly “Top 10” awards. What makes the awards powerful is that they are peer-nominated and voted for by employees (not decided top-down by management). For the monthly Top-10 award, only one question is asked: “who most helped you to succeed this month?” It has nothing to do with how much revenue or profit you made – its sole focus is how you helped others. Asking “who helped you to succeed” dramatically changed the type of nominations received. It became all about people and recognising the right behaviours. The stories of all nominees are visible on a live-feed to make people feel good and to encourage similar nominations.

Go big on spot rewards

You’ve just worked your butt off on a project or you’ve just done something brilliant – but typically you have to wait ages till bonus pay-out date to have this recognised, by which time the reward feels disconnected from the effort and a bit stale. We’re seeing an increasing focus on spot rewards – given at the time the effort or brilliance is actually shown. Whether this a cash reward, time-off or a gift – the impact is so much more positive than the net amount after tax up to 6-9 months later.

Just say “thank you”

It’s no secret that being praised often makes people feel good. Pride, pleasure and increased feelings of self-esteem are all common reactions to being paid a compliment or receiving positive feedback. This is because being praised triggers the release of dopamine, a neurotransmitter that helps control the reward and pleasure centres of the brain. As well as making us feel good, dopamine can also contribute to innovative thinking and creative problem-solving at work.

Incorporating this understanding of the value of praise into your reward approach is fundamental to achieving positive results. One company who really gets this and is doing something about it is the US data management and storage company NetApp. Vice Chairman Tom Mendoza wanted to make sure people knew how much he appreciated their efforts and decided to start something that he calls “Catch Someone Doing Something Right.” Every day, Tom calls between 10 and 20 employees across the company to congratulate them on a job well done – as nominated by peers or managers. Calls can be a short as 30 seconds but have a powerful effect.

Rewards should be something that every employee enjoys and yet we persist with expensive, complex and onerous bonus schemes that often have a negative or neutral effect. In the desire to avoid the negative impact of thoughtless managers, we create a scheme they can’t wriggle out of. Whilst this may tick the HR box, it isn’t doing what we need and what our employees want – to feel valued, to feel special and to feel rewarded.

One of my least comfortable memories as an HR Director was presenting a new pay and grading system to my senior leadership team. My team had worked for months on it – and in my view, it was a thing of beauty.

Continue reading HR: Human, Not Process, Experts

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.

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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?

The “no more ratings” argument seems to be winning. Which is fantastic. Those organisations who have moved to ratings-free conversations show no signs of wanting to go back and the numbers following these pioneers are swelling.

But there’s a thorny dilemma that many of us are wrestling with. How do I get rid of ratings and yet still pay out an annual bonus? The argument goes …. “Our annual performance management system is completely useless, but at least it gives us a fair and transparent way of handing out the cash” (I’m paraphrasing). And this causes us grief. We believe we must have a number to demonstrate objectivity and so we hang onto our gradings (and all the other trappings of an annual performance cycle) to enable to us to make these payments.

Let’s just pause to reflect on the absurdity of this angst.

Crazy huh?

So, let’s assume that you’re going for it, you’re going to remove ratings, but you also want to (or have to) hang onto your bonus scheme or performance related pay – what can you do?

You’ve basically got 3 options – and they’re not mutually exclusive.

1. Continuous Assessment

You can opt for a continuous assessment process, akin to the way schools have moved from a one-off test or exam at the end of the year to periodic grading throughout the year. This seems to work well for those organisations that have frequent and regular performance periods and consistent performance data – sales organisations, for example, or that are project based – such as consultancy firms. By assessing regularly, they avoid the need for a grading at the end of the year and can distribute the bonus based on the average performance across the year or at the end of each of the sales/performance periods. For many companies however, this can be seen as even more onerous than the once a year performance assessment, so not for everyone.

2. Contribution Calibration

You can opt for end of year “Contribution Calibration” where line managers come together to agree who deserves what in terms of their bonus. Instead of a traditional calibration bun-fight where managers wrangle over who gets what grade, they discuss how much each individual has contributed and how much bonus they should receive, relative to each other. There are some real upsides to this approach. You get some good quality conversations about your people and provide challenge to those managers who use the bonus as a means of abdicating their development responsibilities. It’s also a useful way of building in conversations about individuals’ relative worth in terms of the market (helpful for fast growing tech companies where pay levels fluctuate rapidly). The sessions can also factor in discussion around alternative ways in which the individual might want to be rewarded such as promotion or stretch opportunities. It can, however, be seen as unfair and lacking transparency by those in receipt of the outcome if quality conversations haven’t taken place throughout the year. (But, to be fair, that’s the same as what we’ve got now!)

3. Line Manager Discretion

You can simply go for line manager discretion and allow managers total freedom as to what they give to their people, within a capped budget or framework. This is the option that most companies who get rid of ratings seem to favour. If you have had regular feedback between the manager and his/her people throughout the year, and the bonus is simply an extension of those discussions and is therefore expected, this approach can work. If you don’t have those conversations, the bonus can seem to be unfair and arbitrary – and can lead to accusations of favouritism and potentially, discrimination. But again, this is pretty much what you risk today and whilst we retain a system that focuses on one major feedback conversation, it’s really tough to get frequent check-ins going to any great effect.

In truth, there is no fool-proof way of getting rid of ratings and keeping individual performance bonuses. But the worst thing we can do is allow our need to administer the distribution of money to dictate our approach to getting the best from our people. The positive impact of removing ratings has got to be a goal worthy of some experimentation on how to distribute your bonus through different means? The companies who are doing it already are not lamenting the days of “Meets Expectations” so why not give it a try?

A final point – the progressive companies are asking a different question. They’ve already moved on from the 1980’s concept of putting people into performance boxes and are questioning whether their bonus schemes are really working for them. Or whether a combination of paying their people well and recognising effort and excellence through timely rewards that are personalised and thoughtful might not be a more compelling alternative. Maybe that feels like too big a leap right now – but worth keeping in mind?

 We often get asked to work with clients who want to change their approach to performance management. Typically, this focuses on the sensible desire to remove the dreaded appraisal ratings. There’s nothing wrong with this.

Continue reading Thinking about getting rid of ratings? Be bolder and look at bonuses too.

I’ve never hidden my dislike of the annual appraisal, and we don’t exactly lack for articles discrediting them, yet they’re a resilient, persistent breed that doesn’t seem to be going anywhere any time soon. Continue reading Consciously uncoupling appraisals and pay