It’s the most wonderful time of the year — and an expensive, annual ritual. No, not Christmas. Bonus season!
The yearly paying out of lump sums to reward top talent is such a standard, established practice, questioning it may seem a little quaint. More than three-quarters of U.S. companies use performance incentives of some kind. Yet the fact remains, we don’t really know how well they work. Do they encourage people to work harder and smarter?
Behavioral economics and organizational psychology don’t provide a clear answer. “All the literature suggests that money, including bonuses, satisfy a lot less than we think,” says organizational psychologist Tomas Chamorro-Premuzic. It feels good to get that big check, but the feeling is fleeting. However, satisfaction and motivation are subtly different things. Money may not make us happy, but it can motivate us to persevere on an unpleasant task.
One fun study — fun to read about, not especially fun to participate in — asked people to count cash or slips of paper, and then submerge their hands in scalding water. When asked how much their hands hurt, the participants who had counted money rated their pain less than the control group. Kathleen Vohs, who led this research, has conducted an array of other studies with similar findings (if gentler methodologies).
Research also suggests that a performance incentive can help people achieve specific goals — such as quitting smoking or remembering to take their medicine. And financial incentives can cause people to spend less time with friends and family, and more time with their colleagues, according to a study by Julia Hur, Alice Lee-Yoon and Ashley Whillans.
But there’s mixed evidence on whether bonuses drive better performance. Other studies suggest that incentive pay encourages people to produce more work, though not necessarily better work. In another study, behavioral economist Dan Ariely recruited subjects from rural India, where the highest bonus offered — $50 — was equivalent to about five months’ salary. He found that the prospect of such a distractingly large reward seemed to hurt the participants’ performance.
There are good reasons to be cautious about extrapolating from studies to the real world. The participants in such experiments may react differently to monetary incentives than, say, people in sales or investment banking, where bonuses are a particularly important part of compensation. “I don’t think bankers are a special breed of humans,” Chamorro-Premuzic says — sorry, bankers — “but I do think that they are more commercially driven and more interested in financial incentives.”
There’s also the question as to whether an annual “bonus” ought to be considered a bonus at all. It isn’t an unexpected windfall. It’s more often treated as just part of the compensation package, along with dental insurance and paid vacation (though, for top earners, taxed at a lower rate than the rest of their salary).
“Typically, bonuses are structured as a combination of business performance and individual contribution,” says Chamorro-Premuzic. “In the environment that we’ve had since the last [financial] crisis, everyone expects the company performance part to be there. And I think if you’re not hitting your individual contribution, then that’s a sign you should leave anyway. So it does more to de-incentivize than to incentivize.”
There’s plenty of psychological evidence that “bad is stronger than good.” We remember insults longer than compliments, and having something taken away is often more painful than getting something is pleasurable. Giving employees something — whether a bonus, a work-from-home policy or a free turkey at the holidays — creates a new baseline. It soon becomes the kind of thing that the late psychologist Frederick Herzberg called “hygiene” — not an extra, but a minimum. This may be why Goldman Sachs emphasized that the enormous payouts recently lavished on employees were a one-time bonanza.
“The expectation is more important than the actual amount,” says Chamorro-Premuzic. “If I think I will get 80, and I get 100, that’s good. If I get less than I expected, even if it’s more than I got last year, I’m going to be less satisfied.” It also matters how one’s bonus stacks up against others’. Especially among highly paid people — whose basic financial needs have already been met — the number on the bonus check becomes a status symbol. It tells you not only how much your boss appreciates you, but also how you’re doing vis-à-vis your colleagues.
Annual bonuses may not have the motivational power they’re assumed to have, in large part because they’re not truly “bonus” — a bonus is just what we call it. But it almost doesn’t matter whether they boost performance, because they give the company financial flexibility on compensation. And who’s going to complain about a big check?
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by Sarah Green Carmichael
