Why The End Of Year Bonus Is A Bad Idea
Anne Caron
People Strategy Expert | Leadership Advisor | HR Coach | Author | Speaker | LinkedIn Top Voices | Ex-Google
This is the end of the year. We are all getting in festive mood. Yet, while most companies believe they turn into Santa Claus when they give the annual bonuses, for most employees the experience is in reality closer to Krampus leaving them a lump of coal.
MYTH #1: Incentives boost motivation
The idea behind the annual bonus is generally to motivate and reward employees. But the reality is that only a small portion of the employees will get something that matches up to their expectations. If you ask them, at least 80% of your employees would consider themselves top performers. And this large majority of employees sincerely believes that they are worth 100% of their bonus at the end of the year.
But in reality only 10-20% maximum will receive 100% of their potential bonus. Besides these happy few (who generally just think they get just what is owed to them), the large majority of employees (at least 80%) will feel frustrated and betrayed.
As a result, a process aimed at motivating and recognising employees at the end of the year becomes demoralising and frustrating to 80% of your people… What a nice end of year message ?? !
MYTH #2: Incentives boost performance
On top of that, it has been proven by multiple studies that incentive models such as annual bonuses have a pervert and negative impact on performance and motivation.
Daniel Pink, in his book Drive: The surprising truth about what motivates us , presents the following conclusions from his research:?
“As long as the tasks involved used only mechanical skills, bonuses worked as expected: the higher the pay, the better the performance. But once the task asks for even rudimentary cognitive skills, a larger reward leads to poorer performance.”
The carrot-and-stick reward system does NOT work from the moment you expect your teams to perform tasks that involve even basic thinking. And the reality is that even for our most junior staff, we do expect some level rudimentary cognitive skills such as problem solving or communication skills.
Focusing the employee’s attention on the carrot often leads to a lack of understanding of the big picture but also encourages employees to take shortcuts that may ultimately harm the business.
?? The bottom line is that Annual Bonuses actually decrease performance and engagement!
MYTH #3: Performance can reliably be measured
First of all, let's have a look at why and how pay-by performance models were created. The annual process of rating employees’ performance and ranking them was originally conceived at the end of the 19th century when employees were mostly ‘workers’. Their performance was usually measured in terms of output: the number of pieces produced for assembly line workers, for instance. It was then possible then to say "if you produce 5 pieces, you'll get 5 dollars". But in today’s world, more than 70% of the workforce works in service or knowledge-related jobs. Their performance is actually measured by their ability to think and solve problems, their behaviour and customer service skills, their ability to be creative, to lead, etc. These are inputs. And they do not translate well into numbers.
On top of that, those bonuses are generally calculated based on the completion of the employees's objectives that year. But, we are now living in a constantly evolving and changing world. In such a context, how can you possibly measure an employee’s performance based on objectives and priorities that were set a year ago???
The reality is that the completion of objectives is not dependent on the employee. It depends on a number of other factors, most of which are outside of the employee's control. For instance, were the sales people in travel agencies responsible of the none completion of their objectives during COVID? We could even argue that a sales employee who reached 20% of their sales objective that year was probably a superstar!
The truth is that reaching your objectives once is not necessarily predictive of future success!
What is more predictive of success is their ability to find solutions, to think out of the box... Which is probably what led that sales person to reach a booming 20% of sales objectives in such a context.
MYTH #4: Annual reviews are a great time to give feedback
Well, this again is false... and this is why:
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Neuroscience research shows that "conversations about compensation provoke an almost primordial ‘fight or flight’ reaction among employees, which obviously inhibits any productive effect of the feedback or coaching process”.
That means that the large majority of the employees who did not receive the expected bonus amount will disagree with the outcome of the appraisal. They will therefore fight the outcome and bring up all the reasons (most of which usually being perfectly valid... COVID for instance ??) that will justify a better rating and bonus. They will lose faith in the system and disengage. And they will for sure not put as much effort the following year.
The study also found that threat responses like these tend to be more intense and longer lasting than reward responses. (You can find out more on the subject in the excellent article Managing with the Brain in Mind by David Rock.)
Therefore, feedback in this context is totally useless if not counterproductive*!
So what should we do ???
First, get rid of any pay-by-performance system you may have. It is a waste of time, a waste of energy and a waste of money!
Instead of incentives, develop recognition programmes to reward your employees in a timely manner - not just at the end of the year, but each time they do something worth recognising!?These are way more effective to boost performance and engagement.
?? INCENTIVE vs. RECOGNITION
?? Incentives = Carrot?
?? Recognition = Positive feedback
If you want your employees to take initiatives and solve complex problems, do not treat them like donkeys !
I hope this is helpful. If you have an annual bonus system here are some tips on how to go about it this year... and you now have your new year resolution ??
* Find out more about why Appraisal is NOT the time for Feedback nor Career Conversation !
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About the author:
Anne Caron is an international speaker, author and People Strategy expert. Drawing on her 10 years' experience as a senior HR executive at Google, she set up her consulting practice in 2015 to support leaders in building high performing and positive organisations. Through her experience working with entrepreneurs, she developed a practical methodology for startups to grow the right organisation and teams, which she describes in her book?From Zero to 1,000: The Organisational Playbook For Startups .
Find out more about Anne Caron:?www.annecaronconsulting.com