With an increasingly challenging labor market, employers are left looking for ways to attract and retain talent. Most are rightly looking at their benefits and some are looking at bonuses or profit sharing as an option. I am often asked the simple question, “do bonuses work?”.
Sorta.
Let me start by saying that I wish bonuses worked and were simple. As a company that helps organizations build health cultures, it would be gloriously simple to help employers implement bonus programs that drove the culture. However, we seldom call this play because of the complexities involved. Bonuses are simply not a major driver of positive cultural traits. But they can support positive traits that already exist.
Studies show that everyone works for some combination of six reasons. Three of these reasons are proven to be positive for culture and three are proven to be negative. The reasons we work include:
Reasons We Work – Positive Impact on Culture
- We are learning and growing
- We are passionate about the impact
- We like the work
Reasons We Work – Negative Impact on Culture
- We have to work (financial)
- We are afraid to disappoint someone
- We just do it because we’ve always done it
All of us probably work for all six reasons, but culture is driven where people pay the most attention. Organizations where people are constantly thinking about their compensation and how they are the only ones who can do the job tend to have cultures of disengagement and even toxicity. Organizations where people are focused on learning, on the product’s impact, and on the work itself tend to have cultures where people feel engaged.
This is why pay and bonuses are so complicated. If you aren’t making enough money, Maslow will kick your butt and you will be focused on the fact that you need to work. At the same time, if you are making really good money, but are focused on how to make more, this also drives focus on not disappointing other people.
I think that the best strategy is to “pay quietly”. Compensation should allow employees to live comfortable lives. It should be fair and clear. However, too much focus on pay tends to take the attention off the “why” behind the work.
One organization we work with made multiple adjustments to employee’s compensation over the course of a year. They did a couple of pay increases and a variety of bonuses. The employees reported that they appreciated the extra money, but that it also felt a little weird. Some employees started to compare their pay to other companies, something that management hadn’t heard before. Others started to wonder why one department got a bonus and another department didn’t. The extra attention on compensation took attention away from their mission as an organization, even though the pay was beneficial to the employees.
Pay is a motivator, but it is an extrinsic motivator. Extrinsic motivators (motivation from the “outside”) can get us to do things, but they don’t tend to stick. Intrinsic motivation (motivation from the “inside”) is much more effective and “sticky”.
Consider a close friend of yours that asks you to help with a large home project. You go to their house with your own tools and spend all day helping them with the work. Why did you do that? You probably did it because it made you feel good to help out a friend. Now, imagine if your friend asks you to help with a home project and offers to pay you $100. You would probably feel very differently about the work. If you needed the money, you might do it, but now the joy of helping a friend is replaced with your need of $100.
The 3 reasons we work that also support a strong culture are all intrinsic. They activate something inside of us that makes us want to do what we do. The other 3 reasons make us feel like we have to do it.
A bonus can be positive for culture when the bonus symbolizes something bigger than ourselves.
Most bonuses fail for the simple reason that employees don’t know why they received the bonus. When I was at 3M, they offered profit sharing, but the calculation for profit sharing was so complex that it felt like a lottery completely disconnected from things I could impact or control. While it was nice to get the check, it also rubbed me the wrong way when the check was small. The bonus was a symbol for the futility of my work and the impact I made.
When a company does a good job of highlighting the mission of the organization and using the financials and bonuses as a way of keeping score on the success of the mission, then the bonuses can work well.
I wish bonuses did more to drive a positive culture, but very often they backfire and do the opposite. That doesn’t mean that paying a bonus is a bad idea or that it might not even help you, but it does mean that you need to do it carefully. Make sure to link the bonus to performance to the mission of the company and don’t celebrate the money, celebrate the impact that accomplishing your mission makes on your clients.
