Friday 3 November 2017

Do Bonuses Work?

The sort of question that gets posed all the time on a couple of the blogs on our blogroll (e.g. Chris Dillow's and Tom Powdrill's).  And a very fair poser for C@W.

Anyhow, an organisation that somehow once got hold of my email address is Emolument ("crowd-sourced intelligence" - meaning endless surveys) which publishes heaps of stuff on salaries etc as well as firing off emails to all and sundry.  This week's offering is: Does employee performance affect pay? and their survey-based answer is:
"most think their pay is not a reflection of the quality of their work. We also note that bonuses have a limited impact perception of pay. Not a single industry shows a majority who think their performance has a direct impact on their paycheck. Only 8% of those who work in the sports, culture & recreation industry believe the quality of their work will affect their salary ... What about finance? Finance firms often argue that their controversially high bonuses are the key to excellence. With only 30% of financial services employees thinking their pay is linked to their performance, it is an argument which does not convince ... If employees do not believe performance drives pay, what do they think does? Is it longevity, politics, being in the right place at the right time? Whatever it is, the belief that performance has little or no impact on remuneration is disheartening and cannot possibly encourage productivity or a thriving corporate culture."
So - there's the challenge. 

Writing as a capitalist, I have never been in doubt that the sales-force needs to be on a (carefully structured) commission, at the very least.  If you've ever been in an environment where there is reasonable visibility of the sales pipeline and a strong connection between sales in this time-period and the immediate fortunes of the company - in terms of jobs, prospects, opportunties and, if relevant, global bonus pay-outs - you'll find even junior staff caught up in hoping the sales-force brings home the bacon, and not resenting the fact they are on commission.

I've also seen some truly dysfunctional bonus schemes.  But I've worked on some pretty good ones, which certainly needed careful design (and endless tweaking to eliminate unforseen consequences) but were, IMHO, evidence that reward can be made to work in the interests of the firm.

What do we reckon?  Are you fired into productive action by the prospects of bonus, or do you launch into office politics in order to position yourself for the dosh?  Or simply assume it's all in the lap of the Gods?



dearieme said...

A pal of mine outstandingly, obviously merited a bonus. His boss, for some addle-brained reason, denied him one. My pal resigned. The boss was astonished.

Had there been no bonus scheme he wouldn't have resigned; he was perfectly happy in the job.

Electro-Kevin said...

Bonuses should be linked to the long term performance of a company - not a short-term profit.

Graeme said...

I used to work in a large corporation where so called project and contract managers received bonuses at the same sort of level as the sales force despite them tending in the main to do the bare minimum of scope extension activity. I was the finance guy measuring their performance and not on anything like such a bonus package. I saw an incredible amount of them trying things on, arm-twisting to get me to recognise profits early etc so that they could get bonuses. I was not often sympathetic which resulted in a great deal of friction. More often than not, their efforts caused severe problems down the line when some hastily installed workaround had to be fixed. The bonuses earned were not clawed back. I wonder what would have happened if I had been on similar bonus schemes. I think bonus schemes should be very closely targeted and that HR departments are incapable of designing good ones

Anonymous said...

Sales people are the exception: their performance can be measured fairly well. In most other cases, it is extremely difficult to measure how well a person is doing their job.

Many are prevented from doing their jobs well by incompetent managers, who also find ways to take the credit (and get the bonus) if things go well.

Don Cox

Anonymous said...

For me there's two parts to a bonus.

First is the business impact. When a business has a good year then giving a bonus relative to that years performance seems right - you'd soon piss off the work force if you you've had the most profitable year ever but just gave out scraps.
Similarly if the business has had a bad year then it's justified to reduce / remove the bonus.

The second part is the individual contribution - if I've worked hard and contributed more than the person next to me, then I deserve a bigger piece of the bonus pot.

So long as you have the balance between the two about right then to me this is a motivating force to be productive

DJK said...

Bonuses can clearly satisfy some sense of fairness: that the person who contributes most to a business gets a just reward. But I think they demotivate far more than they motivate. As Chris Dillow has pointed out, they drive out other motives such as personal satisfaction for a job well done. (Yes, it exists and is quite widespread). And also, bonuses excite petty jealousy, both in those who didn't get the bonus, or who got a smaller bonus and think that they deserve it more, and in the bonusee, who probably feels that he deserves more recognition than he actually gets.

Sebastian Weetabix said...

It’s one of those irregular verb jobs. I deserve my ample bonus, you are lucky to get it, he is an undeserving chancer without merit.

I saw an idiot boss destroy a business in China. He set sales targets too low & then capped commissions. By July the sales force had their feet up, on the grounds they wouldn’t get any more money & if they sold any more than they had they’d just get much higher targets for next year. The replacement was no better; he gave them a bonus scheme linked to turnover with no tie to profitability. Due to inadequate controls the buggers were selling huge volumes at negative margins. The following year it was all profitability and we sold tiny amounts at huge margin! (I was in marketing at the time, seething with rage.)

Bonus schemes are very dangerous things, you know.

dustybloke said...

Mario Puzo wrote something to the effect that the most effective motivator is the expectation of reward. The gratitude at having received the reward is no motivator at all.

A client of mine implemented a form of profit related pay, which was eagerly anticipated, but gradually disintegrated the workers as some were forced to realise that they were less important to the profit goal than others. And admittedly, profitability was the MD’s secondary goal.

dustybloke said...

What I mean is they strategy to come to work via a Star Trek transporter...

dustybloke said...


Now for the first gin.

CityUnslicker said...

Bonus in truth is a cop out. Everybody would rather have the pay rise. Trouble is, the way the tax system work that is sub-optimal for the company. Also you get over a long period people doing very well and growing fat on the land - see Banks these days, incredible since there are no bonuss and lots of nice payrises.

So it will always be mix and match from that view. The other is that people do have different motivations, those who are really motivated by money need this incentive more than those who don't. Worse, at different times in your life money maybe be more or less of a motivator. it's not easy to motivate people to work!

Nick Drew said...

Further to Mr Weetabix' account, the most destructive I came across was a US utility hell-bent on expansion worldwide who had set on a particular EVP to lead the charge

my firm at the time was a rival bidder for various assets that were on the block (power stations etc) and we were always handsomely outbid by this git and his fat chequebook: but we could never justify going any higher to match him - we were beginning to think we were missing something he knew & we didn't

when his company finally went bust it was revealed his bonus was based on MW capacity bought (as opposed to profitable capacity)

so capacity was what he bought, and capacity was what they got ...