Blog

IMG 2205

Does a bonus culture deliver value? . . . Oh Yes!

Just something I remembered as it becomes clear that it may not be a good thing right now (December 2009) to demotivate the very people who are expected to drag us out of the recession.

Giving a 1 percent raise boosts employee job performance by some 2 percent roughly, however offering that same money in the form of a bonus that is strongly linked to a job well done seems to improve job performance by almost 20 percent, finds a 2007 Cornell study on the relationship between pay and performance.

“I looked at both how much people are paid and also how pay increases and bonuses are given,” said Michael Sturman, associate professor at Cornel University

Often companies presume to motivate their employees through pay packages, including annual increases (USA aka – rises), bonuses and performance related pay. Very few employers (and 1st world governments) today really know how efficient the various mainstream incentives are.
Research done in 2007 by Michael Sturman from Cornell University in Ithaca, New York, exposes some accepted business myths – it shows that, how employees are paid, is at least as critical (if not more) than how much they are paid when it comes to improving employee performance.

Sturman’s study established, like many other studies before, that employees were more likely to push themselves if they were paid above market rates.

He found that smaller pay increases were more effective than equal-sized or even bigger bonuses in improving performance and retention. Regular employees perceived increases in their salary as more advantageous in the long-term, and therefore more important.  (Everybody knows that !-) don’t they? )

But here is the most interesting bit – despite the above clearly obvious findings , Sturman conversely found that when financial rewards were linked with performance, bonuses were much more effective than pay rises in improving employee effectiveness. This goes a long way to show that employees were more likely to see performance-related bonuses as special – ‘a gift for the gifted’ – and therefore worth going beyond the call of duty for.

A problem for companies (and governments) is that despite the findings that show (non performance-linked) salary increases are reasonably effective in inspiring employees into action, bonuses are far more economical simply because they don’t carry an expectation that carries over into following years.

So what IS the most cost-efficient way to motivate employees?

After a series of experiments, Sturman established that management who tied extra bonuses closely to an individual’s performance, could tentatively see an overall 16 percent increase in employee motivation. Substantial increases in performance could therefore be achieved without technically increasing the payroll budget.

Now here is the truly interesting bit – increasing the average annual salary from 2 percent to 3 percent would really only improve overall performance by an average of 2.2 percent, which is still a good thing, however it comes at substantial cost to the company.  BUT, if that raise was combined with changes and how bonuses are allocated, the overall rise in performance could be as much as 19 percent! In a weird (and wonderful) kind of way; bonuses pay for themselves and deliver a premium reward to everyone, however annual pay increases come at a cost to everyone; employees and shareholders and citizens.

If I may be permitted one thought for our governments and leaders to mull over and consider in our journey toward Christmas, Hanukkah and onward to another exciting year on our fabulous planet

“Power is about what you can control, Freedom is about what you can unleash”


Leave a Reply

You must be logged in to post a comment.

%d bloggers like this: