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Do Bonuses Work?

Do financial incentives improve employee performance?

3Jun

In a society that appears to be obsessed with money, it seems like common sense to try and incentivize employees with piles of cash. Bonuses do, however, attract a great deal of controversy. Since the financial crisis, the press has leapt on some of the more obscene sums that have been paid to executives, many of which have seemingly no correlation to their company’s performance. This is especially true of the banking sector, where many see the bonuses as part of a culture of greed that they perceive to have caused the crisis, with banks having dolled out in excess of GBP80 billion since 2008.

Public perception not withstanding, there is also a growing body of evidence that suggests financial incentives do not even cause people to perform better in their role. Not only this, they can even end up actually causing severe damage to the company in the long term.

There are now a number of social science studies into the subject, the majority of which suggest that incentives actually have a detrimental effect on all but the most left-brained, mechanical tasks, and actually end up dulling thinking and blocking creativity.

In his excellent talk at the RSA, career analyst Dan Pink pointed to two studies that illustrate the failures of bonuses to increase performance.

Firstly, Pink looks at a study conducted by Sam Glucksberg 20 years ago. The study assigned two groups the task of attaching a candle to a wall, giving them each only a box of tacks (tacks inside the box) and a book of matches. One group was told they were trying to find an average of how long it took to complete the task, the other were told that the 25% quickest would receive $5 and the fastest would get $20. Contrary to prevailing wisdom, the incentivized group took 3 and a half minutes longer to work out to take the tacks out of the box, attach that to wall and then put the candle in. These findings were reversed when the tacks were taken out of the box.

Pink also notes an experiment conducted by economists from MIT, and sponsored by the Federal Reserve Bank. MIT gave the same task to three groups of people - one group paid a small reward for completion, one a medium sized reward, and one a larger reward. The group offered the largest reward did the worst out of any of the groups for all tasks except those which involved purely mechanical skill. Higher rewards were shown to result in worse performance in eight out of nine tasks examined across the three experiments.

The evidence is that the promise of a reward narrows focus and concentrates the mind, perfect for easy to figure out tasks that have a clear goal. These results are a real cause for concern in business today. Mechanical tasks, the only ones that bonuses tend to benefit, are increasingly being outsourced and automated. Companies are looking instead to their employees to add value with creative thinking. in left brain work is being outsourced, right brain creative tasks are becoming more and more the everyday role.

The harm done to a company does not just come from lower output from employees than might otherwise be achieved, however. It can also lead recipients to actively damage their firm in their pursuit of the reward. Financial renumeration often inspires individuals to help themselves, but not the company as a whole. Banking in particular has seen people try to game the system in their attempt to meet the necessary targets, which have had disastrous consequences for both the bank and the general economy, as demonstrated by the number of scandals being perpetrated - Libor and PPI, to name a few.

Banks argue that it is necessary to attract the top talent, but at what cost to business? It is more likely to attract the greediest talent, and at what stage does the benefits of having such employees on staff begin to outweigh the billions in fines? The ability to game employee bonus schemes increases in line with the talent of the employee, which sees them wasting time attempting to play the system that could be better spent creating new opportunities and ways of working that are actually more beneficial for the company.

The idea of employee motivation requires a whole new need a whole new approach. If you’re thinking about offering bonuses to employees, it’s important to discover first of all to establish what motivates them, through surveys and one to one sessions. There is also a large body of literature that suggests simply that people need to feel like they matter, that what they’re doing is important, and that they are responsible for the outcome. It could be argued that when handled correctly, and not as reward for specific tasks, money can be used as evidence of a company’s appreciation of an employee’s work, but it is a fine balance. 

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