Get Ready to Kiss Your Annual Bonus Goodbye

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Everybody loves a bonus. A little something to sweeten the pot, some extra incentive to get the job done right. While many Americans have grown accustomed to an annual or holiday bonus, it’s become something of an issue for many employers. Much like how annual performance reviews are coming under scrutiny, annual bonuses are as well. But if you’re a recipient of such a bonus, don’t worry – employers aren’t necessarily looking to leave you high and dry.

The problem with annual bonuses is that employees come to expect them, whether they’ve earned them or not. It’s simply something that’s supposed to happen, and though bonuses are supposed to be tied to performance, it’s the expectation that they’ll get them regardless that makes them unattractive to employers.

This is reflected with some empirical data, as well. According to a new study involving “pay for performance” models, a huge number of employees aren’t living up to the expectations laid out for them in order to earn bonuses. Yet, employers keep dolling them out. The study, from Willis Towers Watson, says, “Only 20% of employers in North America say merit pay is effective at driving higher levels of individual performance at their organization. And a mere 32% say their merit pay program is effective at differentiating pay based on individual performance.”

And then there’s this: “Moreover, 99% of employers feel obliged to give these increases on an annual cycle.”

Obviously, there’s a disconnect somewhere, and the question is, how are employers planning to deal with it? The prevailing solution appears to be dumping annual bonus programs. To help make sense of it all, The Cheat Sheet spoke with BetterWorks CEO Kris Duggan – who’s made it his personal mission to destroy annual bonuses – what options are out there.

BetterWorks provides a software platform that helps companies track and set goals, so Duggan knows what he’s talking about when it comes to “pay for performance” bonuses. “We work with a lot of big companies,” Duggan says, “and they’re really rethinking how they motivate people’s performance.How do you connect them to the big picture so that they feel motivated? And how do you work more openly and transparently?”

The answer, according to Duggan, is to completely do away with annual bonuses, or performance-based bonuses.

“I would love that,” Duggan said. “And there are a lot of reasons to justify it.”

The chief primary reason Duggan would like to sway companies to different types of reward and compensation models are that there has been a change in the way employees view bonuses themselves – that is, they’re not really bonuses at all, in their mind. They feel entitled to the extra bump once per year. Secondly, Duggan says that money isn’t all that great of a motivator; the classic carrot and stick model isn’t as effective anymore.

“If you look at any of the studies that have come out over the past few years, they all say that pay isn’t the best motivator. Purpose, understanding the big picture and how you’re connected to that, and feeling like you’re growing and developing,” he said. “So, why is the main primary incentive system based on the non-primary motivator?”

So, what does Duggan propose to put in the place of bonuses? After all, people do expect them – and if you were to simply take them away, you’d have a lot of angry employees on your hands. For that reason, employers are reluctant to pull the plug. Instead, Duggan says to just build the bonus into the default pay structure. Just pay people more. It’s as simple as that.

“The better thing to do,” Duggan says, is to set salaries higher, “set really high expectations, do quarterly goals, and have them (employees) identify those three or five goals that they’re going to work on, do it openly so everyone can see what everybody else is working on. And you don’t need to incentivize any of it through pay.”

So, the question is whether employees would be willing to forgo an annual bonus check for higher salaries. It seems to make sense from an employer’s perspective, and fiddling with the old carrot and stick model could work out in favor of workers, if Duggan’s plan were put into action. Either way, it looks like annual bonuses (like annual reviews) may soon become a thing of the past.

Check out BetterWorks for more goal-setting insight, and head over to Willis Tower Watson for more information related to organizational strategy.

Follow Sam on Facebook and Twitter @SliceOfGinger

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