Employee bonus? No, thanks.
Receiving a nice extra bonus cheque once a year from your employer sounds so tempting. One could say it’s a well-deserved reward for all the hard work you’d performed in order to achieve your targets and help your company grow. So who would say no to some extra cash? And why on earth would you do that?
The wrong-target waterfall
Now don’t get me wrong, I’m not doubting commissions that are directly traceable to the company’s profit (e.g. in Sales). I’m talking rather about those yearly lump bonuses that you receive (or not) based on your performance.
My problem is the word “performance”. Who defines your goals? You guessed it — your boss. And who defines your boss’ goals? Yes — their boss, and so on.
The probability tells us that somewhere in this chain, there is a terrible leader who doesn’t understand the business well, wants to look ambitious in front of his boss, or simply doesn’t set realistic or meaningful goals. As a result, one wrong target decision in management may cascade down like a waterfall to everybody in the company.
Come on, it’s good for motivation!
The reason for offering an annual bonus is usually the supposed motivation factor. But does it really motivate you? What if the defined goals are wrong? Or even not possible to achieve?
I experienced a bonus system, where 75% of the lump sum was entirely out of my hands as it was based on the company’s overall performance. Which, from a perspective of a normal workforce in supporting function, you cannot really influence. That left only 25% for my “motivation”.
Suppose I achieved 80% of my targets. That’s not bad but it reduces that 25% down to 20%. If the company performs well, I’ll get 95% of the total.
And now suppose I don’t care and reach 0% of my targets. Well, I’d still get up to 75%, which is actually really good!
So where is my motivation? Is that it? A couple of percentage points that define the difference between an employee of the year and a complete loser who can’t be bothered?
Thank you very much but I don’t feel the vibe.
The stress factor
One day, I asked my employer for a salary increase sacrificing my yearly bonus. Unexpectedly, they accepted, and part of the maximum lump sum was dissolved into my regular income.
I was more than happy. Not only because of the higher salary but surprisingly, I also felt very relieved! Suddenly, the burden of ‘what-ifs’ disappeared. What if I did some calculation error in my daily business? What if my presentation wasn’t convincing enough? What if I don’t get my bonus? In the bonus system environment, these questions hang around all the time.
And now imagine that some people live on a tight budget (or are in debt) and count on receiving the annual bonus. The stress factor can be immense.
At least the company profits, right? Right?
Let’s sum up. Are bonuses motivating? It depends. But probably not as much as they seem at first sight. Are they stressful? Yes, absolutely.
So how about the employer? What does it do for the company to offer such a benefit?
Well, employees tend to stay longer. People usually don’t want to quit their jobs before collecting their bonuses. At first, it also makes sense financially — if the business is going well, it can share its profit with the employees. If not, no sharing.
But think about it one level deeper. Imagine you’ve made the decision to quit your job but are going to stay a couple of months longer in order to receive your bonus. Would you still be highly motivated and perform your best?
So your company pays your salary for several months of dispirited work, then you get the bonus and then you leave. Doesn’t sound very efficient, does it?
The ticking bomb story
But the worst effects that annual bonuses have on a company can be found within its management. Management bonuses are usually significantly higher and hence it is more motivating to get well-achievable targets and then reach them.
Honestly but also dishonestly.
Managers giving themselves targets that can be easily tricked. Or pushing their people into half-true statements or even straight-up lying to get good looking figures. The sky is the limit.
However, such practices are incredibly damaging to the company as a seemingly healthy business becomes an unstable ticking bomb over the years.
Remember the Enron scandal? This huge company went bankrupt in the early 2000s for many reasons — misrepresenting earnings and modifying the balance sheet one of them. But guess what — its management received hundreds of millions of dollars on bonuses. Because technically speaking, they met their “performance” targets:
Enron’s profit picture was worsening, its debt growing and its margins were dwindling. Nevertheless, Enron executives were actually meeting many of the performance goals set by its board of directors. The problem was that the established goals ignored important measures of profitability.
Source: Forbes
So there you go — do you still believe the annual bonus is a good thing for all participants in the long term? I’m personally convinced that the concept has become obsolete for the 21st century. Hopefully, there is an upcoming shift towards new ideas in rewarding employees.
Like a fair salary without the need of feeling anxious about chasing money clouds that might or might not come. And let’s not forget compensations that are not directly financial — discounts, education, working flexible hours, sabbaticals, certification, etc. which are still criminally underrated. Who knows? Maybe something is about to change!
