The Failed Methodology of Bonuses
Often, the best source for new ideas in an organization are the employees themselves. But according to author Matthew May, management should never give rewards for innovation.
The opening of his article summarizes the theory:
I am constantly asked how to best structure a financial reward system in an effort to motivate people to contribute ideas and improvements. My answer: Just say no.
Combined research from the Employee Involvement Association and Japan Human Relations Association reveals that the average number of ideas submitted per employee annually is 100 times greater in Japanese companies than in U.S. companies. Why? For one thing, we reward the wrong thing in the wrong way. The average reward in Japanese companies is 100 times less than the average U.S. reward of nearly $500. We have it backwards!
In a nutshell: payment for ideas can defeat the purpose.
The ramifications of this extreme proposal have far-reaching effects. The employee who provides exceptional work will often find the announcement demoralizing. The accountant handling the budget will likely be pleased by the reduction of unplanned expenses. Some managers will be frustrated by their inability to reward employees, while others will smugly insist all the best ideas come from themselves anyway. A policy opposing payment for ideas would fundamentally alter the core culture of many organizations.
So why does Matthew May argue against bonuses for good suggestions? Because it attempts to measure what cannot be measured, and value what cannot be fairly evaluated. It establishes an environment of expectation, not one where people are constantly looking for ways to improve without external motivation. The desire to do more should be intrinsic—it should come from within. As May quips: “[We should] not attempt to light a fire under people, [but] light the fire within them.”
Bonuses for innovation stem from an obsession with measurement, a topic The Methodology Blog just covered last week. Studying figures and exercising control sometimes drives process beyond practical benefit. Since we are monitoring output, we assume that we need to compensate according to results. But this logic is flawed. Consider the story of an intern who came up with a million dollar idea. He was already being paid for his job, which is mostly to think up interesting ideas. Paying him twice makes it seem like the compensation is the most important part. According to Joel Spolsky, the intern’s supervisor:
The very act of rewarding workers for a job well done tends to make them think they are doing it solely for the reward; if the reward stops, the good work stops. And if the reward is too low, workers might think, Gosh, this is not worth it. They will forget their innate, intrinsic desire to do good work.
At Slaughter Development, we do not provide management consulting. So why do we care about how organizations structure their compensation systems? Because it impacts individual motivation to conduct and improve the process of work. Methodology engineering is best conducted by the stakeholders themselves because they fundamentally believe in continuous improvement.
If you’re an employee and you are offered something extra for a job well done, consider something radical: refuse to accept that bonus. Tell your manager that you want to be motivated not out of fear, greed or expectation, but out of a personal desire to contribute. Light a fire within yourself, not one beneath you or one to run toward. Get excited about working hard for the sake of hard work itself.
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September 17th, 2010 at 9:29 pm
I can’t disagree enough. If I have a million dollar idea, the company has just made a million dollars all for the paltry sum of my intern’s salary. The management gets bonuses because the company just made another million bucks, but that lowly intern gets nothing. Why should the execs be allowed to line their pockets when they didn’t do anything to create the idea or even implement it? Sure, they made the decision to “allow” it, but making a decision doesn’t warrant a bonus if you argue that creating an idea doesn’t either.
Right or wrong, many people are motivated by money (that’s why we go into business for ourselves, instead of being a cog in someone else’s machine). Don’t reward them for ideas that put money in someone else’s pockets, and they’ll leave for an opportunity that will reward them for their creativity. Then, that idea-and-revenue generator goes somewhere else, and the company loses many millions more, because they were too stingy to cough up a few thousand bucks, or too short-sighted from listening to Matthew May.
September 17th, 2010 at 9:44 pm
I agree that people should (generally) not be bonused for ideas. That is like bonusing people for not slandering the company - in other words it should be a natural.
What I do believe is that people should be compensated based on what they are supposed to deliver and not just time alone - not bonuses, but compensation. Although an individual approach is necessary, I believe people’s pay structure should be based on what they are to deliver (Productivity versus being Present).
I say if someone is unhappy with their job or pay - leave or negotiate better terms. Not keeping your brightest talent is a fault of the owner / manager but if people are paid based on hours they watch clocks. Ideas are a nature to be identified with - in other words “our people are the best in innovation” and not “our people are required”
September 17th, 2010 at 9:48 pm
Thanks for the comment, Erik!
You note that it seems like the intern with the million dollar idea deserves some kind of compensation for helping the company to make a million dollars. It certainly seems unfair at first glance to suggest that the intern should not receive any special compensation at work.
There are two specific issues at work, however. First, we want to be careful about creating intrinsic motivation. Employees need to be compensated, of course, but we should try to make sure that the work is more interesting than the money.
Second, there’s the question of fairness. Shouldn’t a reward from the million dollar idea go to the intern in the form of some kind of commission or bonus? Not unless that individual took on the risk in the first place. Coming up with new ideas was part of the job description and he or she was paid for that work. When you work for someone else for a steady paycheck, you’re taking very little risk. The worst-case scenario is that the company goes belly up and you lose two weeks pay. But when you start or invest in a company, you’re much more exposed. It’s the company shareholders who have taken on the risk. After all, they’ve invested in an employee whose ideas might have been worthless.
It’s true that many people are motivated by money. But that’s not the reason that most people go into business for themselves. In fact, studies show the complete opposite. People don’t tend to make more on average when they are self-employed, and are generally, less motivated by income! They do, however, have greater financial stress.
Finally, I do see your point that the intern in this situation may decide to leave for another opportunity. However, a smart employer will give them the chance to become an employee-owner and buy shares in their own organization. That way they can blend the risk/reward of having big ideas and security of a steady paycheck. Or, they can strike out on their own and take bigger chances.
September 17th, 2010 at 10:03 pm
Wow! Gutsy topic.
If I’m the intern and am offered no compensation or reward for my idea that makes the company $1 million, I will go start my own company or jump ship to a competitor for a big salary to reap profits from my future $1 billion idea.
I think there has to be a balance between intrinsic motivation and external rewards with employees, just as with children. Intrinsic sounds better on paper and is a good long term strategy.
On the flip side, is there a consequence for the employee whose laziness costs the company $1 million? Or do we wait patiently for the intrinsic magic motivation moment that never comes? If we do, what does that do to the morale of Janet Overachiever who tries to help the company, her ideas are implemented, and she never receives any financial bonus or promotion for it?
As a business owner, there are certain risks I take for new business that I would never ever take without the potential for financial reward. Income is not a sole reason for self employment. But life sure sucks without it.
September 18th, 2010 at 12:24 am
I suppose I am a bit torn. And, to be clear, I’m not referring to those million-dollar ideas. Instead, I’m referring to the everyday minor suggestions and improvements that, collectively, add up to significant improvements over time.
Discussing a similar topic years ago, a wise CIO once gave me some advice that I still heed to this day. He told me that in order to encourage specific behavior in employees, a manager needs to incent that behavior. But money is usually not the primary motivating factor. Hence, the key is to listen to the employee and learn what specifically motivates him/her.
Putting this into practice, I found that some employees are motivated by public recognition, an extra day off to spend more time with their families or a little more autonomy over a project they’re working on. A reward that was a little more personal and met their specific needs went further in incenting positive behavior and making work something they disliked a little less.
I think the same root issue is at play here. When comparing Japanese to American workers, I think the American worker has lost that feeling of gratification and fulfillment that comes from being part of something bigger than one’s self. In the U.S., continuous improvement at work is usually someone else’s job. There are process engineers, analysts, QC people and ‘blackbelts’ to do that. We don’t feel like we are part of our companies and we don’t emotionally share in every little company success. We’re too concerned with trading our time for money and trying to get more for less.
In contrast, Japanese implementations of Lean and kaizen, for example, instill in the culture that it’s everyone’s job and responsibility, regardless of your role or rank on the totem pole, to improve whenever and wherever you can. There is a sense of pride in one’s work and contributing to continuous improvement that monetary incentives just cannot replace.
(I speculate this kind of motivation might be why some Americans choose to work for themselves, btw.)
But, we live in the U.S. where our culture demands we be compensated for our time and in proportion to our contribution. And I don’t see it changing anytime soon.