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Why bonuses don’t work


In the early days of my career I was General Manager for Milgram Kagan, a retail specialty store company. James worked in one of our Dallas stores and his proactive style enabled him to make his car payments by receiving a bonus for selling a shoe care product that softened and cared for leather shoes. We paid 50 cents per can sold, and in the late 1970s fifty cents was a great bonus for a $3 product.

What makes this success story both amazing and disappointing is that out of thirteen stores and over 60 employees, James was the only one who made the most out of this bonus. The other 59 employees might have made $10 to $15 a month but no one paid their car off even though any of them could have attained the same results as James.

As an agency owner you have probably experienced similar stories. Most owners have tried bonuses to increase customers up signed up for EFT, number of policies sold, new referrals or life insurance quotes. And, as an agency owner, you probably feel a similar frustration as I experienced as a young executive managing a group of shoe stores. Some people seemed to care for a while but only a few, if any, actually seemed to appreciate and make the most of some great bonus opportunities.

I would be surprised if you didn’t come to the same conclusion I did – bonuses don’t work. Bonuses don’t work because they are almost always used for the wrong reason.

History of Bonuses

Business owner’s experience with bonuses began in the middle of the 20th century. As the industrial revolution continued to gain traction, the workforce moved rural from self-employment to urban employment in factories and other businesses.

By the time of post-World War II economy, manufacturers could sell almost anything they produced. Americans were buying new homes, cars, appliances, toys and everything else included in the American dream. Sales and manufacturing organizations willingly began bonuses because they knew increased production meant increased sales and that meant increased revenue.

Fast forward 60 years or so and bonuses represent something totally different. Competition and an unpredictable economy no longer guarantees increased sales. Rather than offering bonuses with confidence they will put more money in the bank, we offer bonuses hoping to get staff doing more of their job. Even worse many agencies offer bonuses because staff comes to expect the bonus as part of their compensation.

Here are seven reasons why bonuses often fail.

Reason #1 – Bonuses can be an excuse for poor management.

Our society really dislikes discomfort. We most often try to make the symptoms go away rather than dealing with the root problem. Many owners offer bonuses hoping to change the results without investing the time and energy needed to learn why staff fails to deliver the desired results in the first place. As a result, bonuses can become a poor substitute for delivering what staff really needs; a reason to grow.

Employee engagement—providing real-time feedback, recognition, and resources to grow both personally and professionally —is the true mark of effective leadership. Bonuses cannot and will not ever take its place.

Throwing money at a problem will not solve the problem. And if money does appear to solve the problem then it was never your real problem!

Reason #2 – Bonuses try to bribe staff to do their job.

Bonuses are usually explained something like, “I am giving you the opportunity of making more money.If you achieve these goals, you will make more money. In fact, you can make as much money as you want.”

Do you see a problem with this explanation?

What if they don’t want more money?

What if they lack initiative and just don’t want to work harder?

What if they just don’t want to do what you incent them to do?

This strategy empowers staff to decide how they do their job based on what is best for them, not what is best for the agency. It is never in the agency’s nor staff’s best interest to bribe people to do their job. Bonuses are effective to kick start specific behaviors or provide fun and spontaneity by achieving goals; but staff should never have the option to define what is and isn’t their job.

Reason #3 – Bonuses fail to create a “pain of loss”

Many people live by a simple goal to get through today and hope tomorrow will be better. When we yield to this view, nothing substantial exists beyond the problems of today.

In sales, you always want to create a “pain of loss” in which customers don’t want to give up what you provide because they don’t want to lose something valuable they perceive as “theirs”.

Long term goals such as year-end bonuses lack substance when compared to today’s challenges. Bonus dollars lack a feeling of reality for many employees, at least not as real as the stressors they face today. Therefore, they don’t feel a “pain of loss” if they never see their bonus.

Reason #4 – Bonuses only work for certain types of behavior

According to author and speaker Dan Pink (“Drive”), “We are not as endlessly manipulatable and predictable as you would think.”  Pink reports that research at MIT and funded by the Federal Reserve Bank took a group of students and gave them tasks to perform such as memorizing a string of numbers, solving a puzzle and physical tasks such as throwing a ball through a hoop. The group was offered cash rewards for the level of performance.

The study found that as long as the task required only mechanical skill, bonuses for top performers worked as expected. Higher pay equaled better performance. But once the task called for even basic cognitive skills including conceptual or creative thinking, a larger reward led to poorer performance.

The Harvard Business Review points to similar results in a study that found, “The more cognitive sophistication and open-ended thinking that was required, the worse people performed when working for a reward”. The Review also reports that, “Over the thirty years studies continue to confirm that people who expect to receive a reward for completing a task or for doing that task successfully do not perform as well as those who expect no reward at all

Reason #5 – Bonuses don’t produce lasting change.

Research suggests that rewards such as bonuses only produce temporary compliance. Once the rewards run out, people revert to their old behaviors. The reason is simple – Bonuses change what we do but not why we do it.

Frederick Herzberg was a Professor of Management at the University of Utah’s Graduate School of Management.Herzberg argued that, “Just because too little money can irritate and demotivate does not mean that more and more money will bring about increased satisfaction, much less increased motivation. It is plausible to assume that if someone’s take-home pay was cut in half, his or her morale would suffer enough to undermine performance. But it doesn’t necessarily follow that doubling a person’s pay would result in better work.”

If you incent staff to do their job, some individuals will participate as long as the bonus is offered. You haven’t gained an engaged employee. You trained them to beat the system by choosing how much money they want or need and what behaviors they are willing to perform to get paid.

Reason #6 – Bonuses become an entitlement that can never be taken away.

Once upon a time bonuses such as a year-end, merit or Christmas bonus was a meaningful way for management to express appreciation to their employees. In today’s workplace, however, these types of bonuses become expected and they are difficult, if not impossible, to stop without significant consequences.

Here is a brief history of the Christmas bonus according to the Princeton sociologist Viviana A. Zelizer at the Huffington Post:

“At the turn of the 20th century, U.S. employers began substituting the traditional 19th century Christmas offerings to employees — turkeys, watches, candy or gold coins — with a cash bonus. As early as 1902, J. P. Morgan & Company had apparently broken the record by giving each of their employees a full-year’s salary as a Christmas present. Gifts of cash were increasingly standardized, calculated as a percentage of the wage. By 1911, 10 percent was considered “liberal.” Some banks went as far as substituting the Christmas present for a first of the year merit increase in salary.

By the 1950s, the Christmas bonus officially lost its status as a gift: when a firm announced a reduction in its annual Christmas bonus as a way to make up for the expense of introducing a costly new retirement plan, the union tried to negotiate the employees’ holiday bonus.

After the company refused any bargaining, the union appealed to the National Labor Relations Board. The Board ruled that the Christmas bonus could no longer be considered an employer’s discretionary gift but an expected and negotiable component of a worker’s wage.”

Reason #7 – Bonuses can create conflict.

Equal year-end bonuses for staff can and does cause significant conflict.The most common example is when someone who considers them self the “good child” sees someone they perceive as the “bad” child receiving an equal year end profitability or profit sharing bonus.

In the 1960s behavioral psychologist J. Stacy Adams introduced what he called “The Equity Theory”. Stacy proposed that employees seek to maintain a balance or equity between the inputs they bring to a job and the outcomes they receive from it against the perceived inputs and outcomes of others.

Assigning KPIs to all staff shapes a communal environment in which everyone shares responsibility for making the agency the best it can be. Even though KPIs may differ between job responsibilities, everyone feels as sense of equity because each person is required to achieve their KPIs (input) in order to receive all of the performance income (output).

While bonuses are often ineffective when used for the wrong reason, they can be effective when used to deliver short term “course corrections” or spontaneous recognition of achievements.


So are all bonuses “ineffective”? Absolutely not.Bonuses are effective when used to create fun, excitement and focus for short term goals that exceed minimum standards of job performance. A ninety day contest offering $5 for each new umbrella policy is a fantastic idea. It is clear that this is not part of compensation. It is also clear that you have a contest with a start date and end date which means that the bonus is not perceived as an entitlement. The type of bonus helps everyone focus on a short term goal that can change long term behavior, particular when combined with recognition, praise and appreciation.These intrinsic “bonuses” are the ones that truly produces lasting ad profitable change.



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