If you had to guess, how much do you think the average Wall Street bonus rose last year? Five percent? Ten percent?
Try a 20 per cent raise to $257,500 (€247,400), well above the 7 per cent annual rate of inflation slashing wage earnings for ordinary workers and the highest average sum since the 2008 financial crisis .
It’s not much different elsewhere. In the UK, a slew of companies are bracing for bonus protests that have already rankled investors in everything from online grocery group Ocado to bank Standard Chartered.
Anger is easy to understand. These are just bonuses, paid on top of hefty salaries, for reasons that often leave investors baffled.
It’s hard to imagine anything changing. The idea of paying for performance is deeply ingrained. But what if that concept is flawed?
Two new studies of real-world pay-for-performance suggest this is so, in part because many bonus systems are outdated in an age of knowledge work.
In many countries, bonuses first emerged in factories during the previous century to encourage people who performed simple, repetitive tasks to work faster and harder. It was relatively easy to judge how many widgets an individual worker produced each day and pay a bonus accordingly.
Today, more office workers are collaborating in teams on complex tasks that require cooperation and creativity. That makes it harder to judge exactly who is hurting or helping performance, but the bonuses have persisted. “It’s very difficult to break out of that tradition,” says Professor Klaus Möller of the University of St Gallen in Switzerland. “It takes a leap of faith.”
Möller co-authored a study of sellers from the Lichtenstein-based Hilti group, a family-owned company that sells construction products and services in 120 countries, and wanted advice on reforming its pay-for-performance schemes.
At the beginning of 2019, 190 Hilti salespeople in Eastern Europe moved from a 65% fixed salary, which was 35% dependent on meeting performance targets, to an almost entirely fixed salary. (Small non-monetary rewards, such as coupons for family dinners, were paid to teams that won internal company competitions for their performance.)
The results were impressive: the group of countries outperformed the market by a factor of 1.4 in 2019, double the rate of 2018. Staff turnover fell by more than 4% and salary satisfaction increased by 19 %, twice the increase in the entire company. Crucially, sales efforts did not falter.
The new system had obvious advantages over the old one, which was so complex it was difficult to understand exactly how it worked and led to unhelpful habits: staff rushing to close sales deals to meet monthly goals, rather than nurturing more valuable customers long-term. ties with customers.
Hilti teams in other countries have adopted similar systems.
However, that won’t happen at a large German retail chain that also asked researchers to assess pay-for-performance. In this case, the company wanted to know if an attendance bonus would reduce absenteeism.
A study was duly conducted of trainee employees in 232 stores who were offered extra money or more vacation days if they came to work as planned each month.
Unfortunately, the bonus time off had no effect on absenteeism and the cash incentive made it worse: Absenteeism increased by 45 percent, the equivalent of more than five additional days of absence per year per worker.
“It was not what we expected,” says co-author Timo Vogelsang of the Frankfurt School of Finance and Management.
It turned out that paying people to show up for work sent unwanted signals. Some of the staff thought it meant that nights out were widespread; otherwise, why would the company pay for assistance? So they felt less guilty about being absent. Others thought it showed that the job they were asked to do was unpleasant and poorly paid, so they too stayed home.
Professor Vogelsang agrees that the counterproductive attendance bonus adds weight to other research showing that financial bonuses have little obvious effect on workers’ performance, or may not produce the desired effect.
Bonuses can still work for some jobs, he says. “But for the knowledge worker it’s less clear if it’s worth it and it’s much more difficult to identify performance.” – Copyright The Financial Times Limited 2022
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