Busting the myth that bonuses are best for business

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Taxi drivers are less inclined than the rest of us to believe that drinking water is good for you, a risk director at a major insurer recently explained to me. Even those who suffer from pain in their gallstones are more resistant, despite overwhelming evidence that consuming bottles of water will ease their agony. The reason is simple: going to the toilet is, for a taxi driver, time consuming, disruptive and leads directly to a loss of earnings. It is in their short-term, self interest to deny the facts, embrace the myth and hang on. Something similar, only more pernicious, is happening at the top of businesses.

The supposition

Whenever I ask leaders about what they believe motivates their people to perform better, ‘money’ is high on the list. The uproar from the business community about caps on bonuses or, heaven forbid, not paying them at all, is justified by the far more expensive dip in productivity that we are assured will ensue. If you pay peanuts you get monkeys, as many say.

But what if this is a colossal myth on the scale of the emperor’s new clothes? What if incentivising people with money doesn’t improve their performance but, in fact, makes it worse?

Au contraire

A growing body of evidence suggest bonuses do harm not just to our social fabric but to the very thing that justifiers their existence: performance. 

In one experiment, people were given a bonus when they completed a cognitive task, such as a memory exercise, successfully. The group was randomly split into three. In the first group, the bonus was equivalent to a day’s wage, in the second to a fortnight’s salary and in the third to five months’ earnings. 

The first two groups performed equally well, which means that you gained no extra productivity from a bonus equivalent to nine days’ pay, but at least you did no harm. However, those who had the five-month, potentially life-changing bonuses that should have so helped, actually performed significantly worse than their poorer-rewarded brethren.

There’s a saying that, because their skills are so transferable, when banking analysts change firm the only thing that changes is the name on the top of the letterhead. They could well have added ‘and what they earn’, because few move banks for any other reason. And so, if money does lead to greater performance, you’d expect an improvement.

Professor Boris Groysberg of Harvard Business School decided to investigate this. His results showed that when analysts moved firms, their performance typically declined by 20% and they were twice as likely to fall off the crucial rankings table.

In many ways, this shouldn’t surprise us. Self-employed people consistently earn less yet work harder than their employed peers. A study by PwC found that very senior executrices would take, on average, a 28% pay cut for their ideal job – now there’s saving.

Comparisons do matter. Most people say they are more motivated by a smaller absolute amount that was greater than their peers’, than by a larger amount that was less than that earned by people they saw as equals.

The widely heralded assumption that you can pay for performance, especially in complex roles, is founded on little more than hearsay. Plenty of ways have been proven to increase people’s productivity (stretching goals, appreciation, mastering new skills, showing them that what they do matters, autonomy, managers who seem to care, and so on), it’s just that paying more isn’t one of them.

The logic flows that, so long as you put in some of the non-financial motivators, if you removed bonuses output would go up and cost would come down. So why don’t business leaders try it?

And so back to the taxi drivers

A major study from the University of Michigan shows that, wherever you are in the world, the richer you are the happier you are. And so it’s hardly surprising that many of us want to earn more.  If we work for someone else, the only way to justify a boost to our income is, like the taxi drivers, to decry the evidence and perpetuate a myth. The business leaders’ myth is that if you pay people (by which I mean ‘me’) more, you will get something extra in return. Now there’s no money left, we may find out just what self-serving nonsense this is.

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