Can bonuses actually be demotivating?
Updated: Dec 1, 2020
First, strategic and financial goals are confirmed or realigned. Next, compensation reviews. It’s your job to balance employee expectations, company resources, and the owner’s reasonable expectation of return on investment. In other words, to do the most good with available funds.
Compensation includes salary paid, company contributions to a 401(k) program, a health/dental insurance plan, and perks like a sponsored health club membership. Salary raises might not have been an automatic entitlement recently, but were salary readjustments considered as people took on more responsibilities? In some cases, office hours were decreased, effectively implementing a salary rate hike for a position.
While some companies hire low, then raise to the appropriate salary after a probationary period, I advise starting people at full salary, accepting that you will pay for training. Regardless how much you pay or when, you will lose productivity while teaching someone how to use your phone system, transfer files, contribute to dashboard reports, or open a database. The more experience a person gains – the more familiarity with process, clients, and co-workers – the more efficient they become, and the more responsibility they are given. That doesn’t trigger a raise event; it signals the end of paid training.
It’s not always correct to assume your company truly motivates employees with all annual raises or bonus opportunities. Here are some direct-pay options, and the challenges I’ve found with each:
Company-wide, equal payout bonuses “when the company does well.” Without full financial disclosure and goal-setting, employees don’t see the connection between their direct contributions and outcomes. This one-size-fits-all “manna from heaven” reward immediately becomes an expected part of compensation, even during periods when the company doesn’t do so well or needs to invest again in infrastructure. Once given, bonuses becomes the expectation, regardless of verbiage.
Individual pay for performance – very hard to establish and time-consuming to track. These tend to favor people most obviously tied to revenue and/or management responsibilities, demotivating support staff who may also be key contributors. They usually are tied to revenue, not profit, and so the company could be losing money and still owe raises or bonuses. They also set up a competitive environment if a certain amount is going to be divvied up by a selected group at a specific time. An employee is easily refocused on individual goals rather than working toward the greater good for the company, which might better be served with a team approach.
Survey results repeatedly show that, yes, you can motivate with money if you first fairly compensate for each position and then set down clear goals – based on open financials – as to what success means for the company and for the employee. I do favor weighted group bonus opportunities (tied to salary rate so that everyone is motivated and everyone has the opportunity to participate), but first employees have to understand things they normally don’t care about, like financials and margins (in almost every survey ever compiled, employees will overestimate profit margins by an average of 80%).
During the bonus period (quarterly, yearly?) communicate how close the entire team (company, division?) is to surpassing the dollar amount that establishes the pool; people can get real cooperative to hit a joint goal. (Free advice: Cap that pool to allow for reinvestment without demotivating staff, and explain to staff the concept of return on investment for ownership – it should be a budgeted expense).
Still, there is a downside to this program as well. When everyone feels vested in payouts, management has to bite the bullet when it really becomes necessary to drop prices due to market competition. Those margins can also slip pretty fast when you roll out a new product that takes a few months longer than expected to gain traction. People incentivized by shorter-term financial goals may unconsciously sabotage company growth and reinvestment. Equipment upkeep becomes an issue, and everyone can think of a way to save money … in someone else’s department. That’s why the budget has to be defined and communicated first, which should take into account those strategic plans, which follow the performance reviews, which …
And that’s why executive management shudders when, after all that figuring, explaining, and goal-setting, key employees ask for more money to stay if they get another job offer at a higher rate. But that’s another column for another day … and all a part of what it takes to stay open for business.