The Fallacy of Bonuses

In business, people love to talk about bonuses.  “Bonuses are an incentive for employees to work harder.” you hear people say.  But are they?  Let’s take a critical look at this “motivational” practice.

Thinking that bonuses are a path to employee efficiency shows a great lack of corporate empathy by management for the workers.  It represents a disconnect between those who organize the work and those who actually perform it.

Management often thinks that since bonuses are “bonus” money – above and beyond salary – that employees must be delighted to receive them.  But what they forget is that the non-management employees spend a lot of time thinking about their monetary compensation and they are more than aware that that bonus is simply salary that was withheld until the end of the year.  It isn’t “extra” money but salary paid in an irregular fashion – it is an integral part of their total compensation package.

What employees all know, and management seems to not understand, is that employees are never empowered enough to make decisions or to work hard enough to significantly impact a company’s bottom line in such a way as to noticeably change their own bonus.  This seems so obvious that one has to wonder how any management student could ever get away without knowing this instinctively.

Employees seldom get to work in any environment that they deem to be that in the best interest of their own efficiency.  How many more employees would choose to work from home or from the corner office?  Employees don’t determine which projects they work on or who their team members will be.  The management decides the “big scope” items.  Employees are tasked with more specific jobs.  A factory line worker at Ford isn’t allowed to exclaim that “Automotive profit margins are down so I am going to work on making video games instead of assembling fuel injectors.”  Those decisions are left to others.  Non-management employees are not in a position to make decisions of a scale that can affect their bonuses in any meaningful way.

Even in companies that make concerted and sincere efforts to give their employees real decision making power the employees are still shackled by the scale of the company.  Even a small corporation of one thousand employees shows that the actions of any one employee can only have a minimal personal impact.

The reason that people choose to work for large companies is because of the mediating factor that size allows for.  A large company can make large profits or lose large sums of money from year to year but still will have the resources to pay its employees the same from year to year.  Employees are largely protected from market variations and upheavals.  They take little risk and they get compensated very conservatively.   This is the value that large corporations bring to the table when shopping for employees.  Bonuses, when used by large companies, show that companies have forgotten this value and think that their employees will be happier taking risks.

Many people are happy to take risks.  These people are generally entrepreneurs.  Small companies and start-ups have very small staffs where individuals are able to impact the profitability of the company and the individuals can know each other and decide together to succeed or fail.  They are a single team that makes choices together.  They take huge risks but because they do they can also reap great rewards.  This is a calculated risk that makes sense.

When a company pays a good bonus the employees will generally be happy.  Some will think about the fact that this is salary that they earned throughout the year and was withheld so that the company could use it to make more money during the year but many will not.  But when a company does not pay a good bonus – then employees immediately think about how they were not in a position to impact the company’s profits and they blame management for having failed to do its job and then taking the losses out of the powerless employees’ wages.  And this is exactly what has happened.

Bonuses are a means by which managers and companies hedge against losses.  Instead of paying employees what they are worth, they tie the employee’s wages to the company’s performance so that on good years employees get paid market value (one hopes) and on bad years the employees suffer so that the company doesn’t have to spend as much on the labor that it has already consumed.

Any employee who has ever been paid a small bonus is acutely aware of this situation.  I have personally never worked for a company that has paid bonuses and yet just hearing about a company which works in this way makes me shudder and think of middle managers trying to lessen the damage caused by their own incompetence.

Bonuses have no real upside to employees and very little to businesses themselves.  The initial benefit to a company is obvious – reduced operational expenses during times when the company performs poorly.  But in the long term this causes the company to compensate poorly and lose staff capable of moving around easily in the marketplace.  Those who stay are disgruntled and, most likely, under-qualified.

Never tie one person’s motivation to another person’s performance.

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