Most business leaders have been taught from day one that incentive-based compensation—“bonuses"—are an essential management tool. Given the widespread use in almost every industry around the world, the concept has been entrenched in our work culture across the board and has rarely been called into question.
Why bonuses? When establishing a company and looking at hiring practices, every leader asks themselves: How will I motivate the right behavior from my employees? How can I ensure that the people I've hired work hard enough on the right kind of work? How will my company offer a competitive package for new hires? How do I retain leadership talent when there are so many competitors vying for them? The answer to these questions often ends with some kind of monetary incentive program that can be a significant portion of an employee's total compensation.
In 2013, I scrapped employee bonuses, adding them instead to base salaries—and within four quarters, we grew revenue-per-employee by 40 percent. We have continued to grow, showing that in the long-term, the elimination of bonuses hasn't slowed us down. We can capture new opportunities, or abandon stale ones, quickly, without having to negotiate complex changes to bonus schemes. Our people just focus on getting the job done fast.
Here are five reasons why I believe incentive-based compensation is not the way to go:
- Bonuses are more like "luck-based compensation." We have the tendency to see a multimillion-dollar bonus and believe that the executive who received this bonus deserves it based on his or her behavior. Just like anyone who has tried stock picking, in reality, it is a question of simple luck.
- Money may be the wrong motivator. We are all in agreement that many employees want a good amount of money in their bank accounts, but monetary reward in the form of bonuses is generally out of harmony with employees' underlying drivers. People get out of bed in the morning and do amazing things at work because they are excited about the opportunities available to them—in an environment that empowers them. Despite the potential excitement at the thought of extra cash around the holidays, they don't wake up chasing incremental bonus potential. As long as we feel like we are appreciated and appropriately compensated, that extra bit of money isn't a motivation for everyone, especially the type of talent that moves the needle. If you believe money is what is keeping your employees around, then bigger problems probably need to be addressed.
- Bonuses can demoralize employees. When it comes to employee morale, despite the upside for a chosen few, bonus schemes tend to have a lot of downsides. Under-performance and the corresponding disappointment often far outweigh the joys of extra bonus money. For those who put in effort but didn't make the cut for a bonus, the resulting discouragement may drastically impact their desire to continue putting their best efforts in.
- There's disappointment, too. Every company is different, but bonuses generally reflect the company's success as a whole versus the success of the singular employee. All too often, employees sign contracts with possible bonuses that rarely—or never—come through or as big as they had expected. The end result is disappointment and may translate to a new job search for a company that more effectively pays out their bonuses.
- Your company may lose focus. Bonus programs can take a tremendous amount of a management team's time, energy and focus at the cost of other customer growth or employee culture-focused activities. Management teams can get stuck on the wrong strategy or miss opportunities when bogged down negotiating changes to compensation plans.
Instead, company leaders should spend time focusing on ensuring that employees feel that their work and contribution has measurable impact. Instead of a bonus program that doesn't incite the right motivation, how about a stock-option plan? In my opinion, all employees should have stock options. Every employee that works with a company longer than 12 to 18 months should have a stake on the future of the venture. Their contribution doesn't end with employment; it is lasting and might be best reflected in a stock-options program.
The real drivers of performance are being paid at or above our value in the marketplace, giving employees an opportunity to make a difference, providing the right platform to enable each employee to express his or her individual capability, fostering team spirit and ensuring a collaborative environment to achieve more than each employee could do on his or her own. And as a leader, these are the things you should consider being front and center in your management strategy, and they have nothing to do with incentive-based compensation.
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