A bonus always works better if its size is a pleasant surprise (2024)

Alas, behavioural economics and organizational psychology do not provide a clear answer. “All the literature suggests that money, including bonuses, satisfy a lot less than we think," says organizational psychologist Tomas Chamorro-Premuzic. It feels good to get that big cheque, but the feeling is fleeting. However, satisfaction and motivation are subtly different things. Money may not make us happy, but it can motivate us to persevere on an unpleasant task.

One fun study—to read of, not participate in—asked people to count cash or slips of paper, and then submerge their hands in scalding water. When asked how much their hands hurt, the participants who had counted money rated their pain less than the control group. Kathleen Vohs, who led this research, has conducted many other studies with similar findings, if gentler methodologies.

Research also suggests that a performance incentive can help people achieve specific goals, such as quitting smoking. And financial incentives can cause people to spend less time with friends and family, and more time with colleagues. But there is mixed evidence on whether bonuses drive better performance.

Other studies suggest that incentive pay encourages people to produce more work, though not necessarily better work. In another study, behavioural economist Dan Ariely recruited subjects from rural India, where the highest bonus offered—$50—was equivalent to about five months’ salary. He found that the prospect of such a distractingly large reward seemed to hurt the participants’ performance.

There are good reasons to be cautious about extrapolating findings from studies to the real world. The participants in such experiments may react differently to monetary incentives than, say, people in sales or investment banking, where bonuses are a particularly important part of compensation packages. “I don’t think bankers are a special breed of humans," Chamorro-Premuzic says—sorry, bankers—“but I do think that they are more commercially driven and more interested in financial incentives."

There’s also the question as to whether an annual ‘bonus’ ought to be considered a bonus at all. It isn’t an unexpected windfall. It’s more often treated as just part of the compensation package, along with dental insurance and paid vacations (though, for top earners, taxed at a lower rate than the rest of their salary).

“Typically, bonuses are structured as a combination of business performance and individual contribution," says Chamorro-Premuzic. “In the environment that we’ve had since the last [financial] crisis, everyone expects the company performance part to be there. And I think if you’re not hitting your individual contribution, then that’s a sign you should leave anyway. So it does more to de-incentivize than to incentivize."

There’s plenty of psychological evidence that “bad is stronger than good." We remember insults longer than compliments, and having something taken away is often more painful than getting something is pleasurable. Giving employees something—whether a bonus, a work-from-home policy, or a free turkey for the holidays—creates a new baseline. It soon becomes the kind of thing that the late psychologist Frederick Herzberg called a “hygiene" factor—not an extra, but a minimum. This may be why Goldman Sachs emphasized that the enormous payouts recently lavished on employees were a one-time bonanza.

“The expectation is more important than the actual amount," says Chamorro-Premuzic. “If I think I will get 80, and I get 100, that’s good. If I get less than I expected, even if it’s more than I got last year, I’m going to be less satisfied." It also matters how one’s bonus stacks up against others’. Especially among highly paid people—whose basic financial needs have already been met—the size of the bonus becomes a status symbol. It tells you not only how much your boss appreciates you, but also how you’re doing vis-à-vis your colleagues.

Annual bonuses may not have the motivational power they are often assumed to have, in large part because they’re not truly ‘bonus’—a bonus is just what we call it. But it almost doesn’t matter whether they boost performance, because they give the employer some financial flexibility on compensation. And who’s going to complain about a big cheque?

Sarah Green Carmichael is an editor with Bloomberg Opinion

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Published: 30 Jan 2022, 10:37 PM IST