A practice that has infiltrated the business world like a pestilence in a shantytown is the annual bonus system. The idea of this practice is that managers give workers targets, and calculate annual bonuses that usually depend on people’s performance ratings, job position, salary, overtime, age, shoe size, and a host of other variables. The common rationale behind the bonus system is to incentivize performance. But actually, it stinks.

Traditional Systems

bonus system color

Decades of research has confirmed, again and again, that traditional bonus systems rarely have a positive effect on people’s performance when they are involved in creative knowledge work. [Kohn, Punished By Rewards; Pink, Drive] On the contrary, the effect is just as likely to be negative. [Fleming, “The Bonus Myth”; Spolsky, “Incentive Pay Considered Harmful”] There is so much wrong with traditional incentive programs that it is impossible to list all the problems. But I feel incentivized to give you the most important ones here. [Fleming, “The Bonus Myth”; Kohn, Punished By Rewards; Pink, Drive]

  1. People get addicted to regular rewards, and if they don’t get their anticipated reward, they will feel disappointed or punished. This ultimately destroys motivation and thus performance.
  2. Individual rewards disrupt collaboration which is crucial in creative knowledge work. Individual rewards stimulate competition and cheating, which destroys the relationships between workers, and also between workers and their managers.
  3. Traditional bonus systems rely on objective measures, but reality is far too complex to capture in numbers. The metrics often ignore the soft side of good performance, including teamwork and collaboration.
  4. Research shows that rewards distract people from complex work, disrupt creative thinking, and increase people’s stress levels. This causes them to play safe and prefer easy tasks, while innovation requires the opposite: taking risks and doing complex tasks.
  5. The research also shows that bonuses undermine intrinsic motivation and altruism. As soon as rewards are handed out, people start to think, “They pay me extra for this work; thus, it cannot be fun, interesting, or good.”

It should also be noted that bonus systems are usually based on company profits. But creative networkers cannot directly relate their work to their company’s profits, because most of what influences profits—a combination of systemic effects and environmental factors—is beyond their immediate control. [Bomann, “Bonus Schemes Should Be Handled with Care”]

Flat Systems

flat system color

Some people argue that organizations should get rid of their bonus systems entirely. They say most of an organization’s performance is in the system, not in the people, and therefore, it’s best not to differentiate between employees. Everyone should get a steady salary and (maybe) an incidental bonus that is the same for everyone. Some even go as far as to suggest that there shouldn’t be any incidental bonuses at all. Only Christmas bonuses seem to be appreciated, but those count as anticipated (and therefore promised) bonuses; they are not intended to redistribute unexpected extra income of the organization. In other words, these people are all in favor of a flat system, without any unanticipated extras.

I believe a flat compensation system doesn’t address the challenge of paying employees what they really earned. First of all, there is the problem that roughly 80% of all people think they perform better than average [Haidt, The Happiness Hypothesis pag:67], and thus, when everyone gets paid the same as everyone else, 80% of workers will feel underpaid. (It won’t be true, but you can’t argue about feelings without real data.) Second, while bad fortune in business is usually absorbed with conservative salaries and incidental layoffs, good fortune should likewise be enjoyed through extra payouts and by hiring new people. When you don’t pay any extras to workers, the workers share the burden of setbacks, while only the business owners reap the benefits of success. This is probably not motivating to most people. It has certainly never motivated me.

What the world needs is a system that is not flat and is perceived by participants as a true bonus. In my company, I have introduced a merit money system: peer-based bonuses based on actual merits earned among colleagues. What would you do?

Jurgen Appelo is Europe’s most popular leadership author, listed on Inc.com’s Top 50 Management Experts and 100 Great Leadership Speakers. His latest book Management 3.0 #Workout, full of concrete games, tools, and practices, is available as a FREE pdf, and in paperback, Kindle and ePub versions. Get your copy here: https://www.management30.com/workout

cover-landscape-1200This is definitively the most colourful book on management I have ever seen.
Karl Leu, Switzerland

I’m in love with it! The most beautiful and engaging business book ever!
Vasco Duarte, Finland


Bomann, Nikolaj. “Bonus Schemes Should Be Handled with Care” <https://bit.ly/Roavfl> Pointbeing.net, 27 June 2009. Web.

Fleming, Nic. “The Bonus Myth: How Paying for Results Can Backfire” <https://bit.ly/fK7uXJ> NewScientist, 12 April 2011. Web.

Haidt, Jonathan. The Happiness Hypothesis: Finding Modern Truth in Ancient Wisdom. New York: Basic Books, 2006. Print.

Kohn, Alfie. Punished by Rewards: The Trouble with Gold Stars, Incentive Plans, A’s, Praise, and Other Bribes. Boston: Houghton Mifflin Co., 1993. Print.

Pink, Daniel H. Drive: The Surprising Truth about What Motivates Us. New York: Riverhead Books, 2009. Print.

Spolsky, Joel. “Incentive Pay Considered Harmful” <https://bit.ly/11q4Czh> Joel on Software, 3 April 2000. Web.