An effective reward system can motivate employees and increase their work performance. It can have a very powerful influence on people’s behaviour and, therefore, many organisations implement it as an integral component of their compensation strategy. However, not all reward programmes are beneficial. Moreover, inefficient systems are counterproductive, destroy creativity, hurt morale and disrupt collaboration.
A reward system can serve multiple goals and identifying the desired outcome is critical in developing an effective bonus programme. A good system should include some or all of the following objectives:
- Attract talented employees.
- Motivate employees and shape their behaviour in the desired direction.
- Promote personal growth and development.
- Foster teamwork and collaboration.
- Increase employee satisfaction with their work.
- Prevent talented employees from leaving.
Types of motivation
Extrinsic motivation refers to a motivation that comes from outside an individual. The motivating factors are external rewards such as money, grades or praise. An extrinsically motivated person works on a task even when she has little interest in it because of the anticipated satisfaction she gets from some reward.
Intrinsic motivation refers to motivation that comes from inside an individual rather than from any external sources. The motivation comes from the pleasure one gets from the task itself and external rewards have little or none influence on it.
As you can see extrinsic motivation and intrinsic motivation are both important ways of driving employees’ behaviour. Many studies suggest that intrinsic motivation is better, but please bear in mind that it is not always possible in each and every situation. On the other hand, studies have demonstrated that offering excessive external rewards for an already internally rewarding behaviour can lead to a reduction in intrinsic motivation, a phenomenon known as the overjustification effect.
Bonus scheme is probably the most popular and widely implemented reward system. The main problem with bonus scheme is that it may work quite well for top-managers or sales-type roles where numbers are everything, but it’s not that good for creative workers that deliver results that are difficult to objectively measure or assess.
What’s more, as soon as a bonus scheme is applied a reward becomes expected. That is, it’s seen as a part of annual remuneration and not getting it (or getting less than anticipated) is a disappointment. Being expected makes also no room for a warm feeling of achievement when the bonus finally arrives which doesn’t make it work as a true motivator.
Furthermore, in many cases, a bonus is tightly bound with the employee’s performance review which usually results in some people not getting it at all. And this leads to having a group of employees that were told they were failing in their job which, from their perspective, doesn’t sound very motivating.
Finally, bonuses awarded based on the results of performance reviews create jealousy among employees and increase a risk of cheating. Instead of doing good work many employees starts focusing on bogus activities and getting a good bonus. The metrics often also ignore the soft side of good performance, including teamwork and collaboration.
Example of a bonus scheme that led astray
I worked for a company where the quaterly bonus was calculated automatically based on a number of hours you spent on billable projects (sickness leave, training, holidays or periods of time when no client-related work was available were obviously non-billable). Moreover, you were able to get up to 130% of your bonus depending on an amount of overtime work you presented.
It was supposed to be an objective measure that should lead to increased employees’ engagement, but the results were counterproductive:
- Creativity significantly dropped (it was against your personal interest to find better ways of doing things and deliver results faster).
- Tasks started to be overestimated.
- Quality declined (fixing bugs was considered as a billable work).
- Almost everyone started doing a lot of overtime work (but productivity didn’t necessarily increased).
As you can see implementing an objective bonus system is difficult, and in many organisations, it’s just a myth.
It’s not only about cash
Many people assume that money is the only motivator to make employees work harder and that it’s the only solution to address extrinsic motivation. Unfortunately, such an approach is wrong and long-term destroys intrinsic motivation which is usually more effective and more sustainable.
Please bear in mind that individual employees respond differently to a particular reward type. Some people are motivated by cash, but other can be more inspired by social rewards like praise or recognition. It’s, therefore, important to understand the motivational factors of each individual employee and distribute rewards based on employee’s preference and his resulting degree of motivation.
For example, you can reward employees by:
- recognising personal or team achievement in front of others,
- celebrating successes, organising events, etc.
- delegating more responsibility to a team or an individual,
- assigning an employee to a new, challenging task,
- sending a team or an individual to a training,
- offering perks or small gift cards,
- giving additional time-off,
- offering small gifts or services to employees’ families (tickets to SPA, a free babysitter for an evening, etc.).
The most important thing to remember is, however, that nothing will probably work until you create a friendly work environment and build a culture of trust. An effective rewards and recognition system is the next step, but definitely not the first one.
More ideas about motivating employees can be found here: 37 Ideas for Motivating Your Employees.
In a competitive, uncertain environments most of us work in, employees compensation plan should consist of two main parts – a stable, predictable salary and additional bonus that is dependent on how individuals, teams and a whole organisation are performing.
According to Jurgen Appelo a good reward system should meet the following objectives:
- salaries are expected, but bonuses are not,
- rewards should be based on teamwork and collaboration, not competition,
- peer feedback the main driver in assigning bonus,
- creative thinking and wisdom of the crowd should be used to grow and improve reward system,
- bonuses should address intrinsic motivation.
The solution Jurgen suggests is a system (“merit money”) in which employees recognise performance and contribution of their colleagues by giving away a virtual currency to other team members.
Virtual currency represents merits that employees can get from their colleagues and accumulate over time. You can use any name you think is fun and relevant (credits, points, hugs, etc.), but please make sure that no real money is used. For the sake of this post the term “credits” is used.
Every month or so every employee gets an equal pool of credits to share. All the credits have to be shared with others, nothing can be kept for yourself. However, how the credits are assigned to others is a subject to individual’s decision – one can distribute all the credits to one person while others can spread it evenly among all their colleagues. Every person has his own definition of what the best performance mean, therefore, opinions of all employees are equal. At the end of the process, all the credits are distributed and people that efforts are valued the most earned the highest number of credits.
The credits people share and earn accumulate over time. From time to time (random intervals so that it’s not expected!) there is an option for credits to be cashed in using a fixed exchange rate.
A monetary value of the credits may depend on budget and company’s profitability, they can also be treated like shares on a stock market. Employees can have a choice – either they cash the credits or save them for the next round hoping for their value to increase.
The details of the process are a subject for a discussion with the team, but the idea is to make sure that credits are not routinely treated as money at the moment of sharing them.
Don’t be naive – people will try to game the system. But instead of cancelling it please involve employees in making it better. It’s in their best interest to have a fair and reasonable reward system, and I’m sure they will come up with many ideas worth implementing.
Evolution, not revolution
Please bear in mind that changing the current reward system doesn’t need to be a revolution, it can be done step-by-step. For example, 30% of the bonus budget can be assigned to a new programme while the rest is still distributed by managers based on employees performance reviews, goals, etc.
The main advantage of this system is that it involves employees by delegating to them a process of recognising performance of their peers. It’s people’s, not manager’s, decision who, in their opinion, contributes the most to the overall success of the team and what kind of behaviour is valued the most.
The process is motivating in 2 ways – delegation of responsibilities improves engagement and, in addition, it promotes optimal behaviours. Long-term, it enhances teamwork, improves morale and makes the whole organisation perform better.
Bonus scheme or merit money is not the only solution that can be used to motivate employees. It makes sense to combine it with a simple system of saying “thank you” to other people in a nice, recognisable way.
Kudo cards sound like a good solution here. Kudo has a form of a handwritten card that you use to dedicate your appreciation or praise to one of your colleagues. The idea is that every employee can recognise any other person in the organisation and no approval from management is required. Kudo cards are stored in a box that is easily accessible by all the employees. On a regular basis, the box is opened in a kind of ceremony and kudos are handed over the receivers in front of all of their colleagues.
It’s a low-cost system that can have a huge influence on people’s behaviour. Of course, it can be organised online, there can be a small gift associated with a kudos earned, etc., but the idea stays the same.