Bonuses Don’t Drive Performance

I’m of the same opinion of The Globe and Mail article “Bonuses don’t mean better performance” where the author cites several examples in the real world as well as academic research of bonuses not improving output in non-manual labor roles. In my company, we don’t do bonuses, but rather we focus on above-average pay, a great work environment, and positive corporate culture. My line of thinking is that people automatically incorporate the bonus into their standard compensation, and don’t separate fixed from variable pay.

This strategy won’t work for everyone, but I encourage entrepreneurs to proactively decide on their desired type of corporate culture and compensation strategy, and not just blindly follow the plan from their previous employer.

4 thoughts on “Bonuses Don’t Drive Performance

  1. David, good post. Compensation structure is something I struggled with when I hired my first employee in 2004 and have continued to struggle with ever since.

    I read the book “Predictably Irrational” referenced in the article you link and have heard many arguments for and against performance-based bonuses. I can understand how bonuses can add cognitive stress and thus reduce performance when it comes to “thinking” activities, while increasing performance when it comes to “doing” activities, as Dr. Ariely found in his research.

    Even though my company offers a high-level professional service and certainly requires lots of innovative thinking by our employees, we still offer performance-based bonuses and I believe they’ve served as well. My hypothesis why is that even “thinking” jobs require lots of good old-fashioned hard work (i.e., “doing”) in order to succeed. As Thomas Edison famously said, “Genius is 1 percent inspiration and 99 percent perspiration”

    As an entrepreneur, my own compensation is based nearly entirely on my performance, which is a motivator for me. My sales staff receives a good portion of their compensation in the form of commissions, which I feel is a motivator for them as well. In addition to rewarding hard work, properly designed bonuses also cause employees to focus on the *right* things — an added benefit.

    In short, despite Dr. Ariely’s research I don’t we should give up on bonuses just yet.

    1. Great points Jared. I agree that performance-based compensation still makes sense in areas of sales, business development, and certain other positions. My gut says that certain companies do a good job of incorporating bonuses into their culture but most don’t get value from it.

    1. David, thanks for passing along that article as well. I’ll be curious to see the London School of Economics’ study once it’s released.

      I have a friend with a PhD in organization development and she’s often argued that financial incentives reduce people’s intrinsic motivation to succeed. I hear that point loud and clear, but to my mind it’s not an “either/or” kind of thing.

      I think the ideal is to combine intrinsic and extrinsic motivations. I’ve tried to create a culture at my company that values performance for its own sake, and though we stress the intrinsic rewards for doing good work, the financial rewards are still there as well. The intended message to employees is: “We’re a high-performance organization and we try hard because that’s our culture. By the way, we also provide financial rewards for performance, if you’re into that sort of thing.”

      What I’d really like to see is a study that takes 1) a successful business organization *with* financial rewards and removes them, and 2) another successful business organization *without* financial rewards and puts them in. That way culture and values would remain a constant (at least at first) and you could really see the sole effect of the bonuses.

      Wouldn’t it be interesting to see what would happen to Goldman Sachs without performance based bonuses, and Southwest Airlines with them?

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