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How do end of the year bonuses work? That’s a question that you as an entrepreneur that you surely have heard during an interview. And if you have sat on the other side of the table, maybe you asked the question before.
I keep getting asked the same question: what do you do for bonuses at Voys? The short answer is: we don’t do bonuses. In this piece I give context and explanation: an honest story about bonuses. I will explain not only why we don’t do bonuses, but also what we do instead.
The annual bonus
The temporary effect of a reward
An annual bonus is a reward. Research shows that in general rewards accomplish one thing: temporary change.
if you would like to accomplish lasting change in attitude and behavior, rewards, just as punishments, are surprisingly ineffective. Even more, if you say: you get 100 euros if you stop smoking, that appears to work even less than not doing anything. A bonus doesn’t create commitment, and thus you are only temporarily changing behavior. Next to that, people see it as a punishment if they don’t receive the bonus.
Say goodbye to motivation.
A reward makes you perform worse and be less creative
People that expect a reward for performing a task perform worse than people who don’t expect a reward. It’s like this: the more creative the work needs to be in order to get the reward, the worse people will perform. Creativity is connected to doing new things and accepting new challenges. An element of ‘new’ is necessary to improve, change, and innovate.
It all comes down to this: a bonus makes people less creative and innovative.
This video explains exactly how motivation works:
A bonus for the management
But umm, what if you just reward the higher management with a bonus? That is also not a good idea. Unfortunately we still don’t see a connection between higher rewards and the performance of the organization. Actually we see that there is a negative correlation: organizations often perform worse if there are high bonuses for the management.
The consequences of giving bonuses to this layer of the organization can be much greater.
Bonuses and unethical practices
There is a correlation for some businesses where it goes really wrong with their bonus policy. When goals are connected to rewards, this stimulates dishonest and unethical business practices.
The richest man in Brazil, Jorge Lemaan, experienced this with his investment company 3G. He saw the whole business structure fall apart, and there are also talks of corruption. The Brazilian professor of strategy Paulo Prochno explained this risk factor when it comes to bonuses: It’s a huge temptation to be unethical.”
At Lehman Brothers they were also throwing bonuses around, same as at Enron. a couple days before the business went bankrupt, 55 million euros worth of bonuses went to ‘retention incentives’.
Corruption, dishonest behavior, and unethical practices: all of which are strengthened by bonuses.
Bonuses don’t benefit collaboration
Relationship between colleagues are worsened when individual bonuses are at play. Do you want to make collaboration impossible? Let people compete for rewards and recognition. For every person who wins, a lot of others get the feeling they lost.
Instead, let collaboration be essential for the success of the organization.
Bonus: short term versus long term
Bonuses are usually something short term, mostly annual. That makes short term solutions more important than substantial change which has a positive effect in the long term. It makes an organization lazy: its easier to reward quick fixes with a bonus than to focus on the underlying problems that require a long term solution. The last part requires leadership and research shows that there is leadership present in organizations that work with bonus systems.
Less long term thinking and practices and less leadership: is that what you want for your oprganization?
The alternative to a bonus
Offer a good salary and raise it when possible
Offering and paying a good salary seems simple. But what makes a good salary? Pretty quickly you look at minimum salary requirements or salary scales divided by age, education levels, or sector. In practice you will find that a good salary is one that is comparable to the rest of the market and honest. A salary is an allowance for a certain standard of living which makes it very region-dependent. For instance, a colleague in Cape Town would have a different salary than a colleague in Groningen.
A good salary is balanced. It doesn’t work if the top level of the company gets a 30% salary raise while the majority of employees have to make due with a 2% raise. If you do it this way, it will have a negative effect on the enthusiasm people have for their work and the innovative character of the company.
A ‘good’ salary
When posing the question as to what a ‘good’ salary is, you usually look at it from the perspective of the receiver. It is also good to look at it from the perspective of the system that the receiver is a part of: the organization.
For an organization, salary is just one part of the whole cost package of the company. The chunk of total costs labeled ‘colleagues’ for a company is considerably higher than the salary that is paid. Pensions, social charges, and any tax penalties you might pay if you go over a certain amount of payment as dictated by law are all on top of the salary that the employee receives monthly.
I think you also need to look at the total organization. A healthy salary means that it is sustainable and appropriate. And that means it needs to be affordable, both now and in the future. In a perfect world, you have a stable business model where the income side of your business is balanced. In the past years we have this can change massively without the company having any influence on it. That’s why it’s good to connect the annual salary raise to the financial success of the company. Are things going well? Then the raise is higher. Is it not going as well? Then obviously the raise is lower.
To recap, a good salary is:
- Market-based
- Honest
- Balanced
- Affordable for the company
And regular raises are connected to the financial performance of the company.
Credit where credit is due
Once salary is taken care of, then showing appreciation is the second important thing to think about. Your colleagues want to feel appreciated for their work. A simple thank you sucj as a handwritten note, public recognition for accomplishments, things like that go a long way to show your appreciation.
Learning, growth, and development
People want to learn, grow, and develop both in and at their work. Give your colleagues the possibility, both time-wise and budget-wise.
Flexibility and work/life balance
Overworking should never be the standard. If 32 hours is stated in a contract, then your colleagues normally work 32 hours and are paid for 32 hours. On special occasions it can be a little more. Any hours worked over what is in a contract should be written down so that they can be used as extra off hours. We call it time-for-time.
We also value a healthy balance between our work and our private life. Flexibility helps with that. Offering flexible policies, such as working remotely or flexible hours, can be an important motivation for some colleagues.
Next to that, it’s good when colleagues use enough of their leave days. This gives them time to recharge and come back to work more motivated and productive. That’s why buying back unused vacation days isn’t a good idea. Instead – do the opposite and allow colleagues to buy more.
TL;DR: let’s stop rewarding colleagues through bonuses
Here are the cons for giving bonuses in a row. Companies with bonuses:
- Perform worse
- Have less motivated colleagues
- Have colleagues that are less creative and try new things less often
- Are more likely to experience corruption, dishonest behavior, and unethical business practices
- Are more likely to experience less leadership and more often choose short term solutions over long term ones.
- Have coworkers who don’t collaborate with each other well
That’s a lot. Let’s finally stop having bonuses.
What we offer instead is:
- An honest salary
- Credit where credit is due
- A place with the tools to learn, grow, and develop
- A lot of flexibility
- A healthier work-life balance
I think entrepreneurs and their colleagues deserve all of these things.
