More performance through more money? Why bonuses are often counterproductive

More power through more money? Why bonuses are often counterproductive

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B is 50 percent on top? Variable salary components are common – especially in large companies, but also sales in medium-sized companies generate a part of their income depending on success.

The mechanics are simple: the annual salary is divided into a fixed and a variable portion. The variable component serves as an incentive; it is paid out when the employee has achieved a predefined corporate goal.

"I find it amazing that companies believe they have to motivate their employees to act in the company’s best interests," says executive coach Bernd Geropp. The employee would have committed himself to this performance in his employment contract, and the company would pay him a corresponding salary.

"With a financial incentive to do their job well, the company insinuates to the employee that they will possibly only perform part of their job performance." This is insane. After all, you don’t hire someone like that in the first place.

The salary structure in a large corporation would be grotesque. The higher the employee is in the hierarchy, the higher not only his salary, but also his variable salary component. For example, the variable salary component of a department manager would usually be between ten and 20 percent. In the case of the Board of Management, it could even be 50 percent or more.

More performance through more money? Why bonuses are often counterproductive

In a Dax company it would look even more extreme. "The chairman of the Dax board of management sometimes gets 500 euros.000 euros as a basic salary, with a variable salary component, stock options and bonuses in the order of several million euros waiting in the wings," says Geropp in amazement.

"Does someone like that actually have to be motivated to do their job properly and not break their contract??"Either he is intrinsically motivated, or he should go to hell.

Target discussions turn into salary negotiations

"In my nine years as a salaried managing director in a large German industrial group, my compensation and also that of my employees was variable," Geropp recalls. At the beginning, he was also convinced that this variable pay was fair and right.

Over time, however, he began to get the feeling that something wasn’t working right. "Employees started to stonewall during the target discussions," says Geropp. "They were no longer concerned with exploring what was feasible and finding challenging targets. Instead, they wanted to set their personal goals lower and thereby obtain the highest possible earnings as easily and safely as possible."

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With variable pay, every target meeting becomes a salary negotiation at the same time. That was counterproductive. "When companies create financial incentives, they needn’t be surprised if their employees don’t focus on the company’s success, but on maximizing the incentive," Geropp is convinced. They came up with something for that.

An example: The management board of a large German telephone company offered a bonus for new customers. What did the salespeople do? They were persuading their long-term customers to quit, only to win them back as new customers again. Instead of focusing on real new business, they prefer to profit from bonus-compliant pseudo new business.

More performance through more money? Why bonuses are often counterproductive

How motivated are nurses, geriatric nurses or police officers? "As far as I know, these occupational groups are not motivated by variable salary components," says Geropp. Rather, these people are usually highly motivated of their own accord.

"They do an excellent job – even though they only get a fraction of the basic salary of a Dax board member. Not to mention bonuses and variable salary components." Especially in today’s knowledge-triggered jobs, companies need employees who are creative, who think and contribute, who take personal responsibility and are reliable.

"The only way they’ll get something like this is with intrinsic motivation," Geropp is convinced. This would require sense-making. And that is a very special management task. "When managers try to increase employee motivation with a payment system, the individual sense of purpose falls by the wayside."

Five characteristics for a good salary system

Geropp recommends structuring salary according to these five criteria:

1. Lead with goals, but don’t tie goals to salary.

2. Agree on a fixed salary that correlates with the employee’s performance.

3. If the employee consistently shows particularly good performance, increase his or her salary.

4. If the employee constantly underperforms despite support, reduce his salary or part with this employee.

5. Pay a bonus to all employees at the end of the year if the company makes good profits. If the company is doing well, employees should share in it. That is fair. If the company is doing poorly, however, be clear that no bonus will be paid.

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