Should organizations give people bonuses or not? The debate often misses a few key distinctions. Let’s break it down.
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KEY RESEARCH FINDINGS
💎 Intrinsic motivation drives quality
Especially for problem-solving, creativity, and information processing
📊 Incentives drive quantity
Particularly for uninteresting, routine, effort-based tasks
Distinguish between:
• Controlling incentives = rewards tied directly to targets (e.g. bonuses, extra time off)
• Informational incentives = rewards based on overall contribution (e.g. raises, recognition)
🚨 Controlling incentives crowd out intrinsic motivation for interesting tasks.
And most teams rely on that motivation for quality and creativity.
🚨 Two further drawbacks of controlling incentives, and to a lesser extent informational incentives:
• People optimize for the metric, not what’s best for the company.
• They often generate debate and anxiety over calculation and fairness. Simpler systems = less room to argue.
PRACTICAL IMPLICATIONS
If you use bonuses at all:
• Keep them limited (±10–20% of total compensation) to avoid drawbacks
• Don’t position them as permanent
• Make them conditional on always acting in the company’s interest
• Once live, give them limited attention. They’re a reward for action, not its purpose.
🟢 Team bonus (preferred)
Tied to shared metrics, and distributed equally or proportionally to gross pay (= informational incentive).
Examples:
• 10% of annual profit
• 10% of revenue increase over the past quarter/year
• 25% of profit increase over the past quarter/year
• Sum of revenue growth and profit margin exceeding 40% (Rule of 40)
🟡 Individual discretionary bonus
Based on overall performance and context, granted at a manager’s or compensation panel’s discretion (= informational incentive).
• Not tied to fixed objectives → hard to game
• Requires judgment → higher overhead
🟠 Individual contingent bonus (last resort)
Based on predefined, individual targets (= controlling incentive).
E.g. for sales.
To avoid a transactional sales culture detached from the company mission:
• Vest bonuses over several months/years, based on customer retention
• Delivery and support teams must approve deals
• After the sale, sales steps in if there’s any issue
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Bonuses can help, but they have more side-effects than most leaders realize.
Design them carefully, or they will quietly work against the outcomes you actually want.
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