Why Performance Bonuses Can Be A Waste Of Time

If you're comparing rival job offers, then the promise of a performance bonus might make one package seem more attractive than the other. However, not all businesses think the incentive makes sense, especially for IT roles.

Performance bonus picture from Shutterstock

One vocal critic is Patty McCord, the former "chief talent officer" for US streaming media service Netflix. In a recent Harvard Business Review article, she argued that a performance bonus won't bring out the best in employees:

During my tenure Netflix didn’t pay performance bonuses, because we believed that they’re unnecessary if you hire the right people. If your employees are fully formed adults who put the company first, an annual bonus won’t make them work harder or smarter. We also believed in market-based pay and would tell employees that it was smart to interview with competitors when they had the chance, in order to get a good sense of the market rate for their talent.

This makes a lot of sense for technology roles: so many factors that can influence the success of a rollout aren't controlled by IT, so tying a bonus to a system delivery milestone won't necessarily produce better results.

How Netflix Reinvented HR [Harvard Business Review via Business Insider]


Comments

    Further reading: expectancy theory on Wikipedia.

    As LH said: If employees don't believe their extra effort will directly cause them to receive their bonus, (for example if the bonus relies on items outside their control), the bonus is useless.

    Expectancy Theory says the most effective bonuses are when:
    1. People believe their effort will result in performance. (ie. the goal is attainable)
    2. People believe their performance will result in the outcome (ie. if I reach the goal, I get paid)
    3. People value the reward. (ie. a cash bonus paid instantly is probably going to get better results than lunch with the boss at the end of the quarter.)

    Motivational Force (MF) = Expectancy x Instrumentality x Valence

      Wow extremely interesting post, thanks a lot - will have something to read about later!

      If your employees are fully formed adults who put the company first, an annual bonus won’t make them work harder or smarter

      I disagree with this, but also agree with @xqx's information that the reward should be as immediate as possible. We have a profit sharing agreement here with my employer, however it's at the end of the month - and so for at least 3 weeks of that, nobody even gives it a second thought.

      People also tend to 'expect' it, you often hear on the bonus pay statements like 'oh my pay was really bad' - without realising that it's a BONUS, NOT their pay. The fact you nearly always get something shouldn't be taken for granted.

    "Puts the company first" - always makes me roll my eyes.

    They expect the employee to put the company first, but the employee is always the ones that gets the stick. In this case they expect the employee to put the company first but receive no performance bonus, in which case you'd want to expect that the base rate is comparable to other companies total packages.

    While money isn't the greatest motivator, it is probably one of the main reasons people leave a company. Doesn't matter how good your job is, if the pay isn't enough...then you have to go elsewhere.

    Exactly that - "put the company first" sounds like work overtime for no benefit (pay/TOIL), be on-call and loyal to the company. I've seen enough in my 20 odd years to know that company loyalty is not two ways and regularly involves staff cuts.

    If I we're to guess, I would suggest Patty has an MBA and is an advocate of business's "reshaping regularly" - using redundancies/poor performance firings to improve business profitability.

    Could you imagine Patty taking the market-based pay philosophy to say Hollywood and negotiating a with an A-list celeb? :) Or closer to home, how is this position reflected on Netflix's exec's:

    http://www.hollywoodreporter.com/news/netflix-ceo-reed-hastings-gets-668067

    Maybe's that's why Patty no longer works at Netflix - so the exec's could get 25%+ payrises

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