Why Paying Fixed Bonuses is Hurting Your Business
Hi there! My name is Sina. Among other things, my mission is to make Blinkist the best place to work in Berlin. Tasked with reviewing our incentive strategy, I realized something: we were doing it wrong — and everybody else is, too.
In many industries it’s common practice to award employees a contractual bonus in the form of an annual one-time payment, tethered to company KPIs. It’s actually so commonplace that many founders introduce these same old corporate procedures in their otherwise modern and progressive ventures.
Unfortunately, what’s good for the goose isn’t always good for the gander. Old-school incentives in a 21st-century business create an ideological discord that negatively impacts individuals and overall company culture. So what seems like a well-meant motivating measure is actually an expensive misunderstanding that hurts startups and other developing, aspiring companies.
As I researched and read, building a case for a new incentive system we’re just about to implement at Blinkist, I found lots of reasons why startups and other younger companies shouldn’t be using old bonus systems. Here are a few of the most pressing.
Where’s my bonus?
The first time around, people will get excited about receiving their bonus. Later on though, these payments come to be expected and no longer show a positive impact. In fact, only the absence of bonus payments will be a noticeable event thanks to habituation, a normal psychological learning process wherein there is a decrease in response to a stimulus after being repeatedly exposed to it. Soon, your company’s paying bonuses will either burn money with little to no effect, or upset your employees.
You’re not holding that carrot right
If you’re going to incentivise your employees by dangling the bonus-carrot in front of them, it has to be attainable, but difficult to reach. But for every long-term KPI that you have to set in order to agree on a bonus clause, there are two possible pitfalls.
- It dawns on people months before the deadline that the goals aren’t going to be met. Your bonus system is now actively depressing everybody for weeks/months because they know that whatever work they put in now, it still won’t get them to the goal you set.
- It dawns on people months before the deadline that the company is well on track and the goals will be comfortably met. Your bonus system is now actively discouraging people from performing at their best because you made it clear that reaching that sacred numerical target was enough.
So here we are, exactly where nobody wants to be: your incentivising carrot is shredded either way.
The wrong kind of retention
Here’s another issue: bonus payments don’t add to meaningful employee retention. Once the bonuses are paid out, that money is gone and your company no longer benefits from it or the positive associations employees might have had regarding the anticipation of it. The only scenario where bonuses do have a retention element is one that you and everybody who works in your office should absolutely avoid: when Jannis from accounting (who don’ give a f*ck) is just biding her time until the next bonus is due so she can hand in her resignation directly after.
Even worse, why would you want to give those employees that are essential to your operation the perfect opportunity to think about changing jobs? Imagine you’re only getting paid for the month if you work until the last day of it. On the 31st, your efforts are paying off in the form of your glorious pay check. On the 1st, wouldn’t you take a minute and reconsider if you will go through with the whole coming month — and if you’re not 100 % sure, take the opportunity to consider alternative options? This is what you are doing by putting a significant bonus payment at the end of the year. Cashing in will always be a reminder to consider leaving because you might be wasting your investment towards the coming bonus if you don’t stick around until the next payout.
Make an effort, but do it well
Bonuses are usually given out only once or twice a year, so even if you are in the lucky position to get one, you’re only really experiencing and therefore appreciating the reward once or twice per year. Considering the investment, that’s a horrible ROI in terms of cost / satisfaction.
Think about it this way: would you prefer to have a partner that makes an effort to bring a smile to your face all year around, or one that is mostly a middle-of-the-road deadbeat but then takes you out on a single, very expensive date for your birthday and assumes that’s being generous and should be appreciated?
These are only some of the reasons why bonuses might have been a good way to compensate a car salesman who has had a good year, but don’t do any good in a dynamic environment where you want people to be engaged with the company’s vision and long-term goals.
So, what do I do instead?
Well, I’m glad you asked! For Blinkist, I have developed a completely new incentive model that aims to solve all these problems and put a cherry on top.
If you want to know more, you’ll only have to wait a bit! I’ll reveal all the details of the new system soon, complete with what happened when we piloted it with a small part of our team. Subscribe to Blinkist Fieldnotes for the full article or send me a message to sina (at) blinkist.com to get a notification when it’s up.
UPDATE: You’ll find Part II here
Originally published at www.blinkist.com on February 4, 2016.
