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March 26, 2007

Science Daily Week: Which is more effective: bonuses or raises?

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I recently learned about Science Daily. It is a treasure chest of interesting studies that has implications on business practices. I’ve collected so much material from it that this is going to be “Science Daily Week” in my blog.

For example, have you ever wondered whether giving employees a pay-for-performance bonus or a merit raise fosters greater productivity? According to this “Bonuses Boost Performance 10 Times More Than Merit Raises” in Science Daily which pointed to a Cornell study called “Using Your Pay System to Improve Employees’ Performance: How You Pay Makes a Difference” by Dr. Michael C. Sturman, a bonus yields far better results.

Obviously, compensation is more complex than this, but it’s interesting that the study found a ten to one advantage for bonuses.


PS: While poking around the Cornell site, speaking of bonuses, I also found this very interesting study: “Sweetening the Till: The Use of Candy to Increase Restaurant Tipping.” It says that tips go up from 15.1% to 17.8% when a restaurant gives candy.


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» LinkFest for Today from Geekfish Weblog
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Bonuses generate improved productivity more than raises do, according to a recent study from Cornell Center for Hospitality Research, reported in Science Daily (hat tip to Guy Kawasaki.): Giving a 1 percent raise boosts employee job performance by roug... [Read More]

Comments

A lot of great comments here. I think the big question is, how wide-ranging was this study? I can say with confidence, for example, that these kinds of strategies can be quite disruptive in an educational environment, despite what some states seem to believe. Pressure in an environment where you can’t control all of the factors is almost never a good thing. In a school, you have to deal with administration who may or may not be supportive, budget issues that might for instance preclude any copying or having books that were published in the last 10 years, parents who -- as God is my witness -- have told me on occasion that their children don’t need particularly high grades since the parents themselves have found success after having made Cs their whole academic career, and kids themselves, who in all but the top level classes actually could care less about anything you are doing. Add to this the fact that the means of measuring whether you’ve succeeded as a teacher are standardized tests, which in addition to all sorts of cultural problems that I won’t get into here, actually take time away from being able to do your job -- teach.

The book is just awesome, as well as Cialdini himself.In Wall Street, for instance, traders are given bonuses based on performance, which makes sense, since trader work pretty much alone, or then, in small teams.

As an "individual contributor" I was awarded a four-figure bonus. I could take it all at once, or let it ride for a year and get double.

Obviously the creation of some skin-in-the-game type, the "let it ride" offer had a downside: if I left the organization before the year was up, I got zero.

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Bonuses are most effective where people can most influence the criteria upon which the bonus is based - thus in the waitress example, she can influence a lot through her own behaviour, but in a case where someone is reliant on performance of others (e.g. a sales and marketing team), bonus systems can be debilitating because someone can work hard and diligently and receive nothing.

I feel that combination of pay raises and bonuses are important and boost productivity. For instance, if I were to only get bonuses, I would feel as though I was in a dead end job and never going to be promoted. Conversely, if I were only getting pay raises, I may not know what activity on my part got me the raise. I say give regular bonuses to employees that have earned them for specific projects, then if the employee continues to improve some part of the business give them regular pay raises.

Eliot Dill
http://selfmade.eliotdill.com

So many people could learn so much from the Marine Corps, including Guy. Teamwork, Mission Accomplishment, Brotherhood. Create this, and miracles happen.

I wonder if this is similar to why more people go for offers with rebates rather than prefer lower prices generally...

Different cultures, different reactions. It also depends on the company type. If you're in the service industry, it helps boost moral to have some sort of recognition for employees, front-liners, who go the extra mile. It also makes for harder workers.

In anycase, a suprise bonus does sound more exciting than something we can automatically earn.

I found this very interesting. I've read several articles that money is the least motivating thing to give an employee. Public recognition for a job well done all the way to just the "pat on the back" often provide performance boosts that exceed bonuses and raises. My understanding is that this type of recognition reinforces the employees sense of self worth and substantiates that they are a valuable part of a team.

Just a thought...

We give standard raises across the board, but give huge bonuses. It keeps the team wanting to do more!

References to 'culture' in so many of the postings on this issue are spot on. The success - or otherwise - of a bonus scheme is powerfully influenced by culture, especially national culture. There's a wonderful book that actually uses a bonus scheme as its central example of how different nations view bonuses: Fons Trompenaars' Riding the Waves of Culture. A huge eye-opener. Almost on par with Cialdini. And, wow, that's saying something.

We give our employees both.

Put perhaps bonus payraises have more instant gratification whiles having less politics have less emotional & memory based subjectivity than merit

My experience has been that once a business gets too big bonuses stifle it. Here's the sceneario - managers fighting over bonuses by constantly merging departments and divisions so their division gets the credit for a success and the bonus goes to the head of the department/division that owns it at the end of the year. I've seen it in Hollywood (every studio) and in technology (MS). What it does is kill innovation and incentive and make everyone watch their back. Fear of success, fear of failure - if you succeed someone else gets the credit and the bonus so no one tries to do anything that gets noticed or causes waves. The companies survive just fine because at the point this happens it's usually a big enough machine that lack of innovation or quality is irrelevant - they've build so many sustaining businesses around their core products that the company can't go out of business, but they also can't do anything innovative or original. So in the end, what I found, raises are much better because you can never count on a bonus.

It's interesting to note that the study came out of the hospitality industry. Traditionally this industry has starting wages for some positions at or near minimum wage and relies on knowledge growth to get a promotion to a more difficult (and slightly higher paying) job.

In many organizations, performance bonuses don't even exist until an employee enters the management program. Perhaps if more restaurants and retailers offered performance bonuses, there would be less pressure on minimum wage legislation.

Just a thought.

This would imply that you might back check if your teammates gave you a bonus. Could be an interesting experiment.

*******************

It would take a lot of money to make me backcheck. I should play defense--those people never backcheck.

Guy

I'm going to have to agree with Adam's view. I would favor eliminate the reward system and invest in creating a more effective and cohesive unit that wants to succeed because thats what they want not to do not because of some carrot stick technique.


Guy I just bought one of your books, came in the mail today couldn't put it down. So far so good.

Something ahead of me.

It's good to consider what's motivating to the individual rather than to the organization. (To you, X might be a benefit; to me, it's a feature with no value.)

As an "individual contributor" I was awarded a four-figure bonus. I could take it all at once, or let it ride for a year and get double.

Obviously the creation of some skin-in-the-game type, the "let it ride" offer had a downside: if I left the organization before the year was up, I got zero.

The message to me was "we don't think you're likely to stay." And also, "If you leave, the accomplishment we are recognizing wasn't really worth anything."

In theory that's true for senior-executive stock options; in reality we see that NewBiz, Inc., showers largesse on the incoming big cheese at least equal to the allegedly at-risk, not-yet-vested options.

As for group rewards, they're even more complex, and run the risk of encouraging so-called social loafing.

Regarding your P.S. One thing that came out of a negotiation class was 'giving' something during a tough negotiation also helps you gain ground. So, if your are in a tough negotiation, STOP, go to the bathroom and on the way back (don't forget to wash those hands!)...get a few sodas and give it to the tough negotiator before resuming. It's supposed to psychologically help the process...

Andrew

Risking stating the obvious, it all depends on the culture of the company, and how work is developed.

In Wall Street, for instance, traders are given bonuses based on performance, which makes sense, since trader work pretty much alone, or then, in small teams.

If you are in Silicon Valley, and you want to develop a new top-notch product, you'll need a lot of people and a lot of time. When a project's success depends on large-scale team work, performance-based bonuses can lead to unfair compensation, and thus, to a horrible working environment.

A bit off-topic, but relevant: many question that the Nobel Prize structure makes no sense since financial compensation is awarded to a maximum of 3 people, when the research project that lead to a given breakthrough involved many more.

Just my 2 cents...

In my opinion effectiveness depends on the culture you live in. Boni might be better for US citizens, where as here in Germany a raise will do the same.

Getting employees excited about a common goal (and not just some flimsy mission statement) will have a bigger effect on productivity than either bonuses or raises.

Unfortunately, most companies these days lack any sort of worthwhile goals (let alone goals that anyone could get excited about) so they're forced to dangle more cheese in front of their workers just to get them to do the job that they were hired for.

It's a sad reality for both groups.

Re to Jim Cronin:

Absolutely. The book is just awesome, as well as Cialdini himself. A must Read for every Marketer, as it says on the front cover.
Probably for anyone who wants to achieve great things in life.

Hi Guy,
Wasn't it Florida's book on the creative economy that stated that creative professionals actually don't respond to bonuses the same way other employment categories do. I wonder if the study could segment based on role or background?

I learned recently a powerful, well-studied and universal principle from behavioral sciences (or was it psychology): intermittent rewards beat predictable rewards. That is, if you want to reinforce humans or animals doing something, you should reward them from their good deeds unpredictably.

Consequences everywhere, including bonus schemes :)

Re Sweetening the Till....all roads lead to Robert Cialdini's"Influence-Science and Practice" and his rule of reciprocation-a must read for all who seek to influence!

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