Most people think of workplace bonuses as rewards for top performers. But many recipients don’t meet that standard, according to a new study.
Nearly 25% of North American managers will give some financial reward to their lowest performers—those who “fail to meet performance expectations”—the study by Towers Watson Talent Management and Rewards Pulse Survey found. What’s more, 18% fail to set differences in target payouts based on an employee’s performance.
And even those who are doing their best may not get their just desserts: Employers may not have the money to hand out as much in bonuses this year. American companies will only have 87% of the money they earmarked for bonuses available for employees, the same as last year, the study concluded. Since 2005, companies have fully funded their bonus pool just twice—in 2006 and 2010.
Why reward bad behavior? Some speculate that the problem is that it’s easier for managers to just give a bonus than it is to critique a poor performer. “It’s easy for a manager to say, ‘You’ve had a great year.’ But it’s difficult to have these conversations about holding back on bonuses,” says Laura Sejen, global rewards leader at Towers Watson.
That could be bad for business. Firms that reward all staff equally also grow more slowly, make less money, and are worth less when publicly quoted, says Nicholas Bloom, a professor of economics at Stanford University. “In short, they are throwing away profits because they are not well managed.”
At the other end of the spectrum, overly harsh performance-based bonus systems are hard on management and can also do a number on employee morale, experts say. Earlier this week, Bloom says he discussed the issue of rewarding and punishing employees for their performance with the chief of a Nasdaq-listed company. The CEO said he was trying out a tough bonus and appraisal program—a “rank-and-yank” system similar to one pioneered by Jack Welch, the former CEO of General Electric GE—but found it extremely challenging to implement. “People hated it,” Bloom says, “they pushed back, they argued, and he was still fighting to maintain it.”
Another problem with paying bonuses based on performance is defining how to rate performance. Failure to meet certain quotas, for instance, might be a poor indicator of whether an employee is working hard. Workers may be struggling to hit targets against economic headwinds. “One of my clients told me that because the economy has been rocky, it has been hard to meet any preferred targets,” says Steve Langerud, deputy director of global development for the Maharishi University of Management in Fairfield, IA. “And he doesn’t want to punish employees for a situation that he is sure will turn around.” With unemployment hovering at 7.4% and companies cautious about hiring full-time workers, experts say millions of employees are working longer days and taking on more responsibility.
But paying out a bonus to an underperforming employee could also backfire. “It’s a giant slap in the face to those employees—your top performers—who are busting their hump to make the organization successful,” says Tim Sackett, president of HRU Technical Resources, an information technology and engineering staffing firm in Lansing, MI. Rewarding the least able workers can be a drag on employee morale, reinforce bad habits, and also create a corporate culture of entitlement. Hardworking employees, he says, will ask, “Why should I work hard if I can be a slacker and still get a bonus?”
And, bonus or no bonus, studies suggest worker productivity may not change. Less than 50% of employees who participated in last year’s Towers Watson survey said there’s a clear link between their job performance and bonus pay. “Some organizations are simply paying for status quo,” Sejen says. What’s more, studies show high-performing employees are only 2.5 times less likely than average employees to leave for a pay increase, says Michael Crom, executive vice president of Dale Carnegie Training. Employees’ relationships with their managers, their pride in the company, and their belief in the senior leadership are equally—if not more—important than money, he says.