Do Bonuses Work? The Pros And Cons Of Employee Incentive Programmes

Michael Dean
Do Bonuses Work? The Pros And Cons Of Employee Incentive Programmes

There is a certain joy that comes with receiving a bonus at work. Rooted in cognitive and behavioural theories, the bonus exists as a “reward” that is meant to recondition human thought processes and, thereby, the behaviours that follow.

Despite our inclinations towards bonuses, however, there is now a growing body of research that shows this form of reward can cause adverse effects that are detrimental to our motivation.

Here, we’ll investigate both sides of this debate – and look at a growing trend in how rewards are delivered.

The psychology behind bonus payments

Our belief in bonuses stems from a school of psychology known as behaviourism. First pioneered by John B. Watson and B.F. Skinner, behaviorism became hugely influential during the early and mid-twentieth century.

Watson argued that all human behaviour was the result of external conditioning. He held that individuals who are subjected to certain stimuli will come to associate it with certain responses, creating normalised behaviours.

Bonuses are meant to exist as external stimuli to encourage responses that will contribute to the development of normalised behaviours such as increased productivity, enhanced motivation, and a stronger work ethic.

Skinner expanded on these ideas of “classical conditioning” with his explication of what has been called “operant conditioning”. He focused on why certain responses become ingrained as normalised behaviour following the repetition of specific stimuli – arguing that all human behaviour is the response to either a perceived reward or punishment external to the subject.

In Incentive Effects of Bonus Payments: Evidence from an International Company Axel Engellandt and Regina T. Riphahn (2004) explain that despite most economists and managers believing performance-related pay increases worker effort “there has been little empirical assessment of incentive provisions for workers.”

To address this gap in the literature, Engellandt and Riphahn studied 6500 workers using hours of overtime worked and levels of absenteeism as measures of effort. The research concluded that an increased frequency of surprise bonuses to reward exceptional work significantly increased effort.

Ewing Kauffman, chairman and founder of Marion Laboratories (now Marion Merrell Dow) would use a similar technique – once handing a production worker $8,000 in Marion stock for ten years of perfect attendance. On the same day three other employees received stock worth $7,000, $12,000, and $15,000 for money-saving suggestions.

In an interview with Robert Levering, Kauffman stressed the importance of the spirit in which these bonuses were given, saying: “If you do it because you want to be a father and a giver, that’s not good. You don’t give anything. They earn it. Marion doesn’t give anything.” There is a line, then, between acts that incentivise behaviour and those that can be interpreted as paternalistic.

Incidentally, when the company was acquired in 1989, more than 300 Marion employees became millionaires because of the stock they held.

Where incentive schemes can go wrong

There are three particularly strong charges against monetary incentives: they can lead workers to take shortcuts and act unethically, they can reduce intrinsic motivation, and they can cause envy between workers that could lead to higher employee turnover.

Wharton management professors Adam Grant and Jitendra Singh, use a lighthearted illustration of the perverse incentives bonuses can lead to in The Problem with Financial Incentives – and What to Do About It:

When insect parts were found in packets of Green Giant frozen peas, General Mills began awarding bonuses to employees who found these parts during the packing process. Until workers started bringing in insects parts from home to “find” in the peas.

“When strong financial incentives are in place, many employees will cross ethical boundaries to earn them, convincing themselves that the ends justify the means. When we value a reward, we often choose the shortest, easiest path to attaining it — and then persuade ourselves that we did no wrong.”

Given the spotlight on bankers after the financial crises and the bankruptcy of Enron, you don’t need to be a business school professor to recall more serious cases of financial incentives spurring unethical behaviour.

Bonuses may exist in order to condition productivity, motivation, and hard work, but they might instead condition cheating, shortcuts, and negative peer-to-peer communication and interaction.

University of Rochester, psychologists Edward L. Deci and Richard Ryan, have found in numerous experiments that the introduction of external rewards reduces our intrinsic motivation to work on challenging tasks – particularly when the rewards are announced in a way that reduces employee autonomy.

Dan Ariely, a professor of behavioral economics at Duke, also concluded these rewards actually harmed our performance when the tasks being performed “required even rudimentary cognitive skill”. You may be able to incentivise factory staff to pack boxes faster, but it’s more  likely you’ll cause software engineers to write worse code by introducing bonuses.

Incentives also increase pay inequality, which can cause envy between employees, especially if they believe favouritism is behind who receives a bonus. “It’s easy for rewards to be seen as (or to become) subjective, so create a program that’s open to everyone, and make sure there’s a clear process for earning merit and calculating benefits,” explaines Joshua Reeves, co-founder of ZenPayroll in an article on Business Insider.

Conclusion

A technology-fuelled trend away from year-end bonuses towards smaller and more regular financial incentives has breathed new life into the idea of the bonus.

Products like Zenefits, Jump Rewards, next jump, and globoforce, enable managers and peers to reward particular behaviours in ways more closely linked to a business’s strategic objectives and within regular feedback loops.

Whether this change of approach can overcome all the arguments against using bonuses (in particular their effect on intrinsic motivation) is yet to be seen. Thus, any financial incentive scheme should be regularly evaluated to gauge its impact – not only on indicators of effort like absenteeism and hours worked (as in the Engellandt and Riphahn study above), but also on how employees feel about their work and the company’s culture.

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