Over on Boston Filter, Maura Welch had a blog begat (taken from Guy Kawasaki, taken from December entry on Science Daily) about a Cornell study that showed that bonuses had a greater impact on productivity than merit raises.
According to the study, a 1 percent pay raise boosts performance by 2 percent, but the same amount of money proffered as a bonus is better by an order of magnitude. The same sized bonus will yield a whopping near-20 percent performance boost.
The study, conducted by Michael Sturman of Cornell's School of Hotel Administration, also found that paying above the market also produced higher performance.
Having worked at a couple of point for companies that had philosophically decided that they were going to pay "at the market", I actually like this finding better than the bonus vs. pay one.
As for bonus vs. pay: Personally, while some people like the bird-in-hand of the pay raise, I've always preferred the bonus method. To begin with, I'm a deferred gratifcation kind of gal. I like to get paid after a job is completed, not upfront. I like to go on vacation in September, not June. (I'm violating this preference this year. We're going to Berlin in May.)
The trouble with bonuses in almost every place where I've worked is that it's been very hard to connect what individuals accomplish to the overall results of the company. I've worked in places where bonuses were completely based on meeting personal commitments that were, as often as not, easily gamed and seldom real results based. (Who cares if you produced 12 customer profiles this quarter if sales didn't budge.) On the other hand, I've worked in places where the bonus was completely tied to company results. Which meant that you could accomplish nothing and get a good bonus; or accomplish a lot personally, but come up empty because the company tanked that quarter or year.
I'm in favor of some type of middle-ground which leans more toward overall company performance, and which absolutely, positively tries to connect all the personal performance line items to something that actually matters. And the higher up someone is in the organization, it may be best if the balance between what's personal and what's company shifts more and more to what's company.
Over the years, I have seen some really strange bonus plans in action, but none seemed stranger to me than the one that we had at Genuity. I worked there for nearly three years and, if I'm remembering this correctly, received two quite hefty bonuses during that time. This despite the fact that the company was bleeding - losing a billion dollars a year or so during my tenure. I'm not sure how the payout was figured, but if I recall, for directors and above, "incentive pay" was awarded annually and that the percentage was the same across all levels. I beliee that the percentage to be awarded was voted on by executives who were , in fact, voting on what percentage to award themselves. (Can this possibly have been the case?) No wonder the bonuses were so large!
Meanwhile, the quarterly bonuses given to rank and file employees had a far lower percentage cap, and were always nickeled and dimed.
Of course, Genuity is no longer around.....
At a far smaller company, there was one year in which we had a whopping $20K to spend on bonuses. Senior management decided to give 10 individuals $2K each. A nice idea (given that I was one of them, and given that they asked for my input - and listened to - my input on who the other 9 shoudl be). When it came to giving the checks out, however, they decided that the whole thing was a deep dark secret, and swore everyone given a check to silence.
Well, it didn't take the people who weren't getting bonuses that day more than fourteen seconds to figure out what was up - and there was no way to keep them from talking about it. Everyone knew who'd gotten bonuses, and management had squandered an opportunity to a) recognize key individuals; b) let everyone know how and why the awards were being made. This, of course, wouldn't have kept people from complaining or second guessing, but it would have at least have put management on the line for making sure their choices were defensible.
Compensation. Bonuses. It's all pretty tricky.
The bottom line of this particular bottom line is that the process should be as transparent as possible. People should know clearly how the plan works, what the ground rules are, and how and why what they're doing contributes to the "grand scheme" of things.
Unless this is happening, any link between bonus and performance is going to be a case of post hoc but not necessarily propter hoc.