Why Bonuses Don’t Work

It’s bonus time at many companies — the annual rite of payouts when those who work at a company with a bonus structure, may be handsomely rewarded. As the competition for talent grows ever fiercer, particularly among those fighting for Millennials who seem to be gravitating in greater numbers towards the halo of Silicon Valley, sweetening the deal with bonuses is a strategy that many companies employ.

But do bonuses work? Can you buy loyalty or happiness with a hefty check? Research shows that money isn’t the key to keeping talent, and yet, it’s the fallback tactic for many companies from start-ups to legacy organizations.

Twitter recently announced that it’s doling out cash bonuses of $50,000 to $200,000 as well as restricted stock options to some employees to keep them tethered to Twitter for another 6 months to a year. With its stock value tanking, Twitter is scrambling to retain its brainpower.

Throwing money at the problem isn’t a silver bullet, and Twitter is only the tip of the iceberg. Multiple studies, including ones that we’ve conducted at McKinsey, show that talent doesn’t stay committed because of bonuses. While compensation is a factor, the cocktail to keeping the best people, the ones that contribute and innovate, is much more complicated and nuanced.

The fear of talent turnover is real. It’s expensive, time consuming and has a psychological impact on morale and culture. More than half of the companies we’ve surveyed believe that talent retention has become even more difficult in recent months — 65% reported that senior management is extremely concerned about retaining talent. And they have a reason to be concerned. Employee dissatisfaction numbers are alarming. According to Gallup polling, only 3 out of 10 American workers currently feels engaged at the office. This finding is even more unsettling, considering the fact that demotivated (59%) and actively disengaged (14%) employees cost the American economy up to $355B in lost productivity every year.

So is there a formula that works? Is there a secret to talent retention?

Instead of using trial and error, at McKinsey we are turning to science, using data analytics to get true insights from the organization to the individual. The insights have been surprising and at times counterintuitive.

We started down this path three years ago when we took a good hard look at our own retention challenges. We expected the data to show us that factors such as competitive offers and burn-out to be behind most peoples’ decision to leave. After all, we know consulting can be tough on work/life balance. But instead our analysis revealed that people who reported being mentored and coached by their manager and others, who were building greater expertise, and who felt an “affiliation” were the most motivated and likely to stay, regardless of compensation levels and opportunity. Shockingly, we found that money didn’t matter as much as we assumed.

Armed with this information, we were more targeted in devising new programs to monitor and further strengthen our own coaching and mentorship relationships, including intervening proactively to retain those “at risk.” We’ve also tripled down on building out learning, development and career paths aimed at building expertise.

Three years later, we are now using data analytics when working with many clients on similar challenges, helping them to cut attrition by up to half and avoid anywhere from $2 million to $20 million in recruiting and retraining. The strongest thread that links nearly all of the studies is that when to the goal is retention, motivating employees is more connected to success than offering bonuses, especially after a threshold is met.

Motivation is also a key factor in organizational health — an organization’s ability to perform over the long-term. “Healthy” organizations outperform the stock-market by 3X, in no small part to their ability to retain and develop their people. After decades of research, we have discovered that the top ways to motivate employees are through:

1. Meaningful values: Connecting employees’ work to compelling and personally meaningful values

2. Inspirational leaders: Inspiring employees through encouragement, guidance and recognition

3. Career opportunities: Providing career and development opportunities

4. Financial incentives: Using performance-related financial rewards

5. Rewards and recognition: Providing non-financial rewards and recognition to encourage high performance

Again, money is undeniably an ingredient in the motivation cocktail, but it’s not the main ingredient. And when deciding what to do with limited resources, it makes sense to focus on building the right pathways and programs to get higher motivation than the checks alone provide.

We know that talent retention is connected to motivation and money alone doesn’t motivate for very long. People need to feel connected to the company where they are working. They want leaders who lead and who are transparent in sharing their goals and vision of the organization. People want to feel that their careers are progressing, that they are developing professionally, and that they are getting recognized for their work. They want a culture that values its talent and also honors its values.

These issues may all seem obvious, but it’s abundantly clear how often they go neglected while talent — great talent — leaves. In fact, we’ve found that two-thirds of “top talent” leave because they are dissatisfied with senior management. Leadership, we’ve found, or lack of it, is a better indicator of talent attrition than a retention bonus.

So as we think about bonus time, it’s important to remember that compensation is really a temporary Band-Aid if employees don’t feel connected or invested in an organization. Instead of throwing money their way, give employees more opportunity to own a project or a process. People are everything, investing in them in the right way is critical to not only keeping them, but to keeping the company growing.