Do Bonuses Matter? They Do If Part of a Fair and Equitable Rewards System

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Ever since financial scandals rocked the business world and the worldwide financial crisis that followed, the role of reward systems in business has become a divisive issue.

On one side are the proponents of bonuses who state that emphasis on monetary rewards increases productivity and organizational performance. On the other side are the opponents of bonuses and monetary rewards who state that bonuses create higher pay inequality and can result in higher turnover.

However, a key question regarding bonuses is often overlooked: How important is handing out bonuses for an organization to become and stay successful for a longer period of time?

12 potential characteristics of rewards systems

One way to obtain an answer to this question is by studying the results of research into the characteristics of high performance organizations (HPOs). A survey that my firm conducted was aimed at identifying characteristics that would explain the sustainable success of an HPO.

In reviewing much published data, the following 12 potential HPO characteristics emerged in respect to bonuses and reward systems:

  1. A fair reward and incentive structure.
  2. Reward systems that reinforce core values and strategy.
  3. Pay and incentives linked to long-term performance.
  4. Rewards based on relative performance, both inside and outside of the company.
  5. Reward systems should emphasize group performance over individual performance.
  6. Creative and flexible rewards, tailored to different employees needs.
  7. Rewards on the basis of performance-based pay, that is, only for the results they achieve.
  8. Emphasis on intrinsic rewards, i.e., monetary rewards that favored such meaningful intrinsic rewards as fun, personal development, teamwork, challenge, accomplishment.
  9. Rewards of stock in the company, thus increasing employees’ commitment and financial interest in the company.
  10. A minimum threshold for incentive pay but no cap on pay-outs of incentives:
  11. Reward systems that support employees in terms of strengthening their skills by rewarding them when they develop their knowledge and skills.
  12. Rewards for results, not for mere efforts or for seniority.

No correlation with competitive performance

Although most pay-related HPO characteristics may be considered to be fairly independent from each other (see 1, 3, 4, 5 above), some have a positive correlation (such as 1 and 2 above) while others seem to be conflicting (e.g., 8 and 9, 7 and 11, or 7 and 12). This suggests that there is not just one systematic way to construct a reward system suitable for an HPO, but instead many different types of reward systems can potentially lead to high performance.

During further analysis, it became apparent to us that none of the 12 characteristics exhibited a significant correlation with competitive performance, meaning these characteristics were not related to organizational performance. This leads to a conclusion that bonuses and reward systems are not distinguishing factors for creating and sustaining an HPO.

Thus, well-performing organizations are just as likely to use bonuses or certain types of reward systems as they are not. Using bonuses will therefore neither help nor hurt organizations in their drive to achieve sustained high performance.

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Needed: a rewards system that is fair and equitable

To prevent any misunderstanding, let me add that I am not saying HPO research shows that bonuses and well thought-out reward systems are not important. However, the HPO research does show that such systems are not distinguishing factors for creating and sustaining HPOs. Instead they are mere “hygiene factors.”

The high performance organization needs to have an appropriate reward system (whether or not it includes bonuses) that is considered by employees to be fair and equitable. If such a reward system is not in place, the organization will run into trouble and opposition from employees, rendering the goal of becoming an HPO virtually impossible.

But if such a system is in place — and it does not seem to really matter what type of reward system it is as long as it’s appropriate for the organization in question — employees will consider it normal and will be content. This allows the entire organization to start thinking about how to turn itself into an HPO and, in the process, start making this a reality.

Editor’s note: More information about HPO research is available in Andre de Waal’s earlier article for TLNT, The High Performance Organization: Does Your Organization Measure Up? And in What Makes a High Performance Organization: Validated Factors of Competitive Advantage that Apply Worldwide, he will publish many interviews and cases about the real success factors of High Performance Organizations.

André de Waal, PhD, MBA, MSc, is Academic Director of the HPO Center, an organization which conducts research into high performance organizations. He is also Associate Professor of High Performance Organizations at the Maastricht School of Management, guest lecturer at Vrije Universiteit Amsterdam and Erasmus University Rotterdam, and visiting fellow at Cranfield University (United Kingdom).

André has conducted several years of scientific research, examining 290 international studies and analyzing studies in 50 countries involving over 1,470 profit, non-profit and government organizations.