You've heard the expression, "When life gives you lemons, make lemonade," right? Well, get out the juicer.
Given the economic climate, now is a great time to make just one significant change at your firm that will
result in better retention and more productive and creative employees, not to mention a bit more money at the
end of the year.
The solution: eliminate bonuses.
Did you just fall out of your chair at such sacrilege? OK, sit back down – I have recent anecdotal evidence
from Wall Street, as well as scientific research, to back up this recommendation.
I don't know anyone who isn't infuriated about the bonuses paid to financial services executives who clearly
did not deliver. It's amazing that Wall Street's 2008 bonus pool will be $19.9 to $23 billion once the dust
settles. Has there ever been a better case against the pay-for-performance model?
But let's look at the science. Dan Ariely, PhD, a professor of behavioral economics at Duke University
(and author of "Predictably Irrational: The Hidden Forces That Shape Our Decisions") conducted three studies
to examine the question, "Does the promise of a big bonus push people to work to the best of their ability?"
Subjects were offered different levels of payment according to how well they performed certain tasks
(such as fitting together pieces of a puzzle, throwing a ball, and playing a memory game). About a third of
the subjects were offered a small bonus (an amount equal to one day's pay), another third were offered a
medium-sized bonus (approximately two weeks' pay), and the last third were told they could get a large bonus
(five months' pay). Which group do you think performed best?
Ariely and his group found, "The people offered medium bonuses performed no better, or worse, than those
offered low bonuses. But what was most interesting was that the group offered the biggest bonus did worse
than the other two groups across all the tasks."
The studies were repeated on two other occasions, at MIT and the University of Chicago, with the same
results: higher bonuses mean lower performance.
In a 2002 Harvard Business Review article, Boston-based Alfie Kohn wrote, "Research suggests that, by and
large, rewards succeed at securing one thing only: temporary compliance." But what I found most interesting
in the same article relates to the recent Wall Street shenanigans:
"Excellence pulls in one direction; rewards pull in another. Tell people that their income will depend
on their productivity or performance rating, and they will focus on the numbers. Sometimes they will manipulate
the schedule for completing tasks or even engage in patently unethical and illegal behavior."
Substantial rewards for achieving utilization targets, for example, can encourage associates to pad
their time sheets with soft hours. Such behavior is always bad, of course, but is especially troublesome
in difficult economic times when all bills undergo close client scrutiny.
Here's the frosty glass of lemonade: Since bonuses don't work, and may in fact be destructive, why not take advantage of the moment to pay your
workers better base salaries and forgo the bonus altogether?
Take some of the money you'll save and apply it
in ways that make life better for your people: childcare, a health center, a subsidized cafeteria with prepared
meals to take home, health and wellness programs, less expensive health insurance, you get the picture. Going
forward, hire only those who are intrinsically motivated – people who want to do the work because it's what they
were born to do.
Innovative change takes courage and an open mind. Before you convince yourself that the evidence above doesn't
apply to your organization, ask yourself if your incentive plans are producing the results you're paying for.
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