As I sat there on my couch holding my pen in my hand, I was pissed off. I had to write a check for $24,000 to my employer. I had not completed my third year of servitude and was obligated to pay back my full sign-on bonus and moving expenses. Any pretending that my last two and a half years was anything more than a transactional financial relationship disappeared with each pen stroke. As I wrote out the words….twenty…four…thousand…. it felt so painful.
I had been brainstorming ways to evade paying it back. Would they really come after me in small claims court? Most people asked me “why not wait six more months?” I don’t have a good answer other than the psychic costs of staying and not getting started on my freelance journey being too high. I felt a deeper pull towards this journey that I could not explain. That and I figured if my life came down to having $24k on hand, I had enough friends to go begging to.
Mounds of research have shown that bonuses are a bad idea. Save for routine tasks, bonuses decrease performance on average. Yet we keep offering them over and over. In a conversation with a senior executive at a previous company, I shared some of the damning research. She assured me that I was wrong. “My personal experience has shown that bonuses make a difference…How else would you motivate people?” I decided not to show her the research on confirmation bias and moved on.
However, is the research open and shut? Nassim Taleb has opened my mind to questioning even the acceptance of my own confirming research that bonuses are a bad idea. Taleb argues that the types of behavioral economics experiments that show money is a de-motivator are too simple – results at the individual level often do not scale at the group level. Which got me thinking.
What might be the sensible reason for a bonus program to exist at the organizational level?
The Intended Function Of a Bonus Is To Signal Fairness – If you Work Hard, You Will Be Rewarded
Most companies fail the tests of fairness. In my experience, most organizations pay a bonus to all employees and only slightly more to top performers compared to bottom performers. Research has shown that human performance matches a power distribution, which means that top performers should be paid dramatically more than average performers. Google has tried to implement this at the company – but most companies are not google.
The Actual Function Of a Bonus Program Eventually Defaults To Signaling That the company is a “serious” company (skepticism mine)
I will argue then that in the absence of serving a fairness function, the bonus defaults to a signaling mechanism of showing that the company takes itself seriously. If a senior executive wanted to get rid of a bonus program, they would have a lot of explaining to do, not to mention be undermining the very beliefs in which they have raked in massive bonus payments throughout their career. It would be personal narrative suicide. Just look at the flack the CEO of Gravity Payments got when he made the minimum salary at his company $70,000 – people still call him crazy to this day.
It takes courage to not follow the script.
The Unintended Consequences of Bonus Programs Ends Up Being Manipulation, Destruction of Trust & Personal Annihilation
It felt painful to write that $24,000 check because it made me realize that I was just a cog in the wheel. I was given a sign-on bonus so that I would be scared to leave. Nothing more, nothing less.
The unintended consequence of a bonus program is that it incentivizes de-motivated employees to stay in their job. Take Sarah, who hates her job. She has her performance review in December and is told how much she will be paid as a bonus, to be paid in April. Many companies make it unclear whether Sarah can still get her bonus if she leaves within those four months and Sarah would be crazy to bring it up. So Sarah stays until April when the money finally hits her bank account. Yet at this point, she is wondering whether it is worth it to stick it out another eight months to find out her next bonus. This is crazy for both the employer and employee – yet I hear about this dynamic all the time from friends and clients.
Everyone has worked with Ralph. He is the guy at the company that is able to game the system. No one really likes working with him, yet he is politically savvy and knows how to maximize his bonus. Its not a secret either. “Ralph knows how to game the system.” As soon as Ralph gets paid, as a certain amount of trust is forever destroyed within the company. Once people acknowledge the system is rigged, everyone thinks they are getting screwed.
Finally, bonuses encourage all-out personal destruction. In many companies, performance is still relatively hard to measure – so we default to the easiest proxy: time at work. Investment banking is the extreme example. If an alien landed on this planet and observed investment bankers giving up sleep and ruining their human relationships they might assume they are working on the most important mission on Earth. In investment banking you don’t even have to worry about who is working the most – they are all maximizing the number of hours they are working and sitting tight until the next annual bonus. I would be surprised to find an investment banker that is not burned out (and have yet to find one in my personal network)
How can this be good for anyone?