How Bonuses Reduce Motivation and Productivity
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Most people are not motivated by money.
Sure, you need to make enough money to survive. And then some to have a good life, but research shows that working for a big monetary reward actually reduces results.
I’ve had countless negotiations with potential employees. In most cases, the positions that needed filling included using the brain as a tool without too many instructions.
I have paid fixed salaries, commission only salaries, part fixed and part bonus salaries. Through all of that, I have noticed that the model by which you get paid is not really important. Except in very rare cases where the person’s motivation is almost directly tied to payment.
There are three main factors that matter:
- How much are you paid, or are you paid enough.
- How hard you have to work for it.
- Are you treated fairly?
Here’s an engaging TED talk from Daniel Pink about motivation and how most businesses get it wrong.
Career analyst Dan Pink examines the puzzle of motivation, starting with the fact that social scientists know but most managers don’t: Traditional rewards aren’t always as effective as we think. Listen for illuminating stories — and maybe, a way forward.
What do people want in their compensation and work?
Here I will bring out the compensation side of the motivation.
There are other aspects of motivation — the meaning of the work or how you make the world a better place. Then there’s the team and support you get from your colleagues. Most people also want some balance in their work and personal life. Their balance point may be in a different place for you and me, but it is somewhere.
1. You need to get paid enough
How much are you paid?
In it’s most basic form, you just need money to sustain your life. If you don’t get enough money to keep you from worrying about it, then you have more stress. In this situation, you are constantly looking for a better job.
You are not performing at your peak. You are tired, you are anxious, and stressed. What is the amount needed to stop worrying? It’s the minimum amount that lets you forget when the payday is.
“Enough” is different by person, industry, and country. Some people never have “enough,” and that will make their lives miserable.
At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history.
Heller responds, “Yes, but I have something he will never have — ENOUGH.”
There is no substitute for hard work. Never give up. Never stop believing. Never stop fighting. ~ Hope Hicks
Another critical point is that those who don’t have enough money will not understand those who say that money is not important.
It is, as long as you don’t have “enough” of it.
Never tell a poor person that money is not important.
There are some, who don’t have enough and value other things over money. But in general, it will just make them see that you are totally clueless about their situation.
In a study, economist Angus Deaton and psychologist Daniel Kahneman found that emotional well-being rises with income, but there is no further growth in happiness beyond an annual income of $75,000.
Low income exacerbates the emotional pain associated with such misfortunes as divorce, ill health, and being alone.
High income buys life satisfaction but not happiness, and that low income is associated both with low life evaluation and low emotional well-being.
Positive affect, blue affect, stress, and life evaluation in relation to household income. Positive affect is the average of the fractions of the population reporting happiness, smiling, and enjoyment. “Not blue” is 1 minus the average of the fractions of the population reporting worry and sadness. “Stress-free” is the fraction of the population who did not report stress for the previous day. These three hedonic measures are marked on the left-hand scale. The ladder is the average reported number on a scale of 0–10, marked on the right-hand scale.
3. The level of effort to keep the motivation up
The second part of the equation is how hard you have to work for it. It can’t be too simple or easy, or it wouldn’t pay well. If it’s too hard, you will burn out no matter what’s the pay. The best level for most people is something where you have to stretch and develop yourself.
The “not too hard, but you have to stretch yourself” level is also the level where you can achieve the flow-state.
In a flow state, you are most productive and deliver the best results possible.
3. How to be fair?
The third part is about group dynamics. People want to be treated fairly, and this means that if two people are doing the same job, then they expect to be paid the same amount.
Even monkeys want to be treated fairly. In the video below, you can see that when one monkey is rewarded differently for the same task, then to one that feels mistreated gets pretty mad. One monkey gets cucumbers while the other eats tasty grapes.
If results matter, then you have to give them some weight. But when you compensate directly based on results, then you will not get the maximum performance.
When results are hard to quantify, then people may expect to get paid by seniority. If the work is exactly the same then the seniority pay shouldn’t be very high. Basically you are paying for them to stay in the company.
For example, if two accountants do exactly the same job, they should get some base salary plus seniority bonus. One of the benefits that the organization receives from people working for years is that you don’t have to spend on HR to find and train new people.
When you combine all three points, then your success will reflect in the loyalty factor and employee retention.
Now if you add all this you would get:
- enough money, so you don’t have to worry about your income,
- work that is challenging but won’t break you, and
- social standing in your group, where you are treated fairly.
Do bonuses work?
Now, here’s the question. Why the hell do you need the bonuses?
If you need bonuses to make your ends meet, then you are not getting paid enough. If bonuses make you work harder, then you would be out of your optimal performance zone and burn out. If you consistently perform at the level that warrants better pay, you should get a rise, that’s treating you fairly.
Research has shown that bonuses will lower the performance of the people who use their brain as the primary tool. It seems that money narrows the field of vision for people who need to come up with creative solutions.
Dan Ariely ran several studies in India and the US that showed how high bonuses will deteriorate the results. When people were working for extremely high bonuses, then they usually failed to achieve the best possible outcome. Take a look at the PDF of the India study.
We found that as long as the task involved only mechanical skill, bonuses worked as would be expected: the higher the pay, the better the performance. But when we included a task that required even rudimentary cognitive skill, the outcome was the same as in the India study: the offer of a higher bonus led to poorer performance. ~ Dan Ariely
Money and salary is not a particularly good motivator in the long term. ~ Matt Mullenweg
How to motivate your people?
So, as long as you are managing the team of knowledge workers, you could just follow these steps.
- Pay them enough that they don’t need to worry about the money.
- Let them come up with solutions to interesting problems, don’t push them to exhaustion.
- Treat them fairly.
This way you don’t have to come up with elaborate bonus schemes and get the most creative work they can produce.
But people want to get recognition. Give bonuses that are related to achieving large common goals. These bonuses should be very specific but not tied to any personal results. To avoid entitlement, don’t give the bonuses regularly. Not a regular, quarterly of Christmas bonus, but a bonus when you reach a specific milestone.
To kill yourself for earning a salary is not worth it. ~ Nargis Fakhri
Image: Money by Andrew Magill