Why bonuses don't work

Performance-related pay misses the point - most of us aren't primarily motivated by money, says historian Jerry Muller.

by Jerry Z. Muller
Last Updated: 29 Jan 2018

We increasingly live in a culture of metric fixation: the belief in so many organizations that scientific management (aka ‘best practice’) means replacing judgment based upon experience and talent with standardized measures of performance, and then rewarding or punishing individuals and organizations based upon those measures.

Yet metric fixation is in fact often counterproductive, with costs to individual satisfaction with work and to organizational effectiveness. One of the key features of metric fixation is pay for measured performance.

Many of the problems of pay for performance (P4P) schemes can be traced to an overly simple conception of human motivation, one that assumes people are motivated to work only by material rewards. Pay for measured performance is particularly attractive to people in finance, in part because they most closely fit this model, in that they are inclined to measure their success in purely monetary terms.

Of course, material rewards have appeal to most people, to some degree. But some are motivated less by extrinsic monetary rewards than by various sorts of intrinsic psychic rewards. Such rewards include a commitment to the goals of the organizations for which they work, or a fascination with the complexity of the work they do, which makes it challenging, interesting, and entertaining.

‘But surely,’ you might think, ‘there is a place where pay for measured performance is appropriate, and that is in the realm of business.’ Businesses, after all, exist to make money, and people work in them in order to make money for themselves. It makes sense, it seems, to try to elicit their greatest effort by tying their remuneration as closely as possible to their measurable contribution to making profits for the firm.

In general, extrinsic rewards – pay for performance, incentive pay, bonuses – are indeed more effective in commercial organizations where the primary goal is to make money. But even here they have their limits: for the fact that the organization exists to make money and that monetary gain is one aim of their employees does not mean that it is their only aim. They too are motivated in part by intrinsic, psychic rewards.

In general, pay for measured performance is most effective when the work to be done is repetitive, uncreative, and involves the production or sale of standardized commodities or services; when there is little possibility of exercising choice over what one does; when there is little intrinsic satisfaction in it; when performance is based almost exclusively on individual effort, rather than that of a team; and when aiding, encouraging, and mentoring others is not an important part of the job.

For sales forces, or for routinized, individualized, highly-focused jobs involving standardized outputs and without broader responsibilities, rewarding measured performance may well pay off. There are many such jobs in any society, including a modern, technologically advanced one. But in our time, as the technologies of robotics and artificial intelligence advance, such jobs are becoming fewer and far between.

But the salient fact is that most private-sector jobs do not match these criteria. And to the extent that they do not, direct payment for measured performance will be inappropriate and perhaps counterproductive.

People do want to be rewarded for their performance, both in terms of recognition and remuneration. But there is a difference between promotions and raises based on a range of qualities, and direct remuneration based on measured quantities of output.

For most workers, contributions to their company include many activities that are intangible but no less real: coming up with new ideas and better ways to do things, exchanging ideas and resources with colleagues, engaging in teamwork, mentoring subordinates, relating to suppliers or customers, and more. It’s appropriate to reward such activities through promotion and bonuses – even if it is more difficult to document, and requires a greater degree of judgment by those who decide on the rewards.

Indeed, the academic evidence on pay for the measured performance of CEOs and other personnel is sufficiently troubling that some scholars of organizational behavior have suggested that it should simply be eliminated.

Dan Cable and Freek Vermeulen of the London Business School, for example, having noted many of the characteristic flaws of P4P schemes, concluded that it might be more advantageous to abolish pay-for-performance for top managers, and replace it with a higher fixed salary.

They even suggest, rather heretically, that you might not want people motivated primarily by extrinsic motivation at the head of your company. Yet the more compensation is variable and linked to measured performance, the more likely it is that these will be precisely the sort of people you will get.

In recent decades, governments in the UK, the US, and elsewhere have tried to extend P4P schemes into services, such as education and medicine. There too, results have been meager at best, counterproductive at worst – creating a culture of gaming the metrics in which performance is measured in ways that are at odds with the goals of the organization that P4P is meant to improve.

Too often, metric fixation is a theory that fails in practice. Though it is touted as scientific, it more often resembles faith – and an increasingly implausible one at that.

Jerry Z. Muller is Professor of History at the Catholic University of America. His book The Tyranny of Metrics, from which this essay is adapted, has just been published by Princeton University Press.

Image credit: Billion Photos/Shutterstock


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