Santa Says Year-End Bonuses Aren’t for Everyone

It’s that time of year when companies continue to throw good money after bad, even in an economy where we can least afford to waste time and money. A Robert Half survey indicates that a majority of companies that give end- of-year bonuses plan to increase them over last year.

I have no problem with performance bonuses properly constructed. The problem is that almost none are. By properly constructed, I refer to the design and implementation of plans that adhere to what the science of behavior (behavior analysis) has discovered about behavior and its consequences. I am somewhat encouraged by the data reported by Challenger, Gray and Christmas Inc. that fewer companies planned to give end-of–year bonuses this year than last. However, I am afraid this is due more to the poor economy than an increase in the knowledge that bonuses are problematic.

To quote a talent management blog on the subject, Max Messer, chairman and CEO of Robert Half, said, “For many companies, higher bonuses are in recognition of work by employees who put in extra effort this year, often with fewer resources.” The problem is that in most end-of-year bonus programs the money is not tied to giving extra effort, but is instead given across the board. The requirement for a bonus is, more times than not, doing enough to be on the payroll at year’s end.

Giving a bonus to a lazy, disgruntled or dissatisfied employee does not make him or her a better performer, less disgruntled or more satisfied. What it does is disgruntle the high performers when they see the malcontents get a bonus at all. Although some executives think the bonus will have a positive effect on retention of professionals in high demand, I think it is more likely to fund job searches. If you want an example of how high compensation does not create happy employees, you need look no further than the NBA.

Small companies can get by with end-of-year bonuses simply because in many small companies all employees carry their load, help fellow employees and give outstanding customer service. In this special case, an across-the-board bonus falls on good effort. This bonus will at minimum cause employees to like the company better. Apart from this special case, however, larger companies have much more variance in performance and attitude, which makes bonuses more of a problem.

Because money does shape behavior for good or ill, much care should be given to the requirements necessary to earn it. I emphasize the word earn because that should be primary in the decision to award someone a bonus. If bonuses are truly earned by above-and-beyond contributions to the mission, vision and values of the enterprise, it will be a good investment. Employees will work harder and smarter and enjoy the place where they do it. If it is done across the board or as a defensive measure – to avoid turnover – it is a waste of time and money that will eventually put the organization at risk.

If you want to understand more on this topic, I encourage you to read Sin of Wages by William Abernathy. He has also written several articles that will shed some light on what you can do differently to set up pay systems that lead to earning discretionary effort from your employees, including Creating a Profit-Focused Workplace.