“Paying people for work, without destroying their motivation, is one of the most difficult challenges for management. Regrettably, most compensation systems are considered unfair by employees and unscientific by experts. That’s why it would be wise to consider some lesser-known alternatives that are based on real merits instead of imagined performance,” wrote leadership guru Jurgen Appelo in his book #Workout: Games, Tools and Practices to Engage People, Improve Work, and Delight Clients.
We know that clearly most of the current merit systems in place are epic failures. Traditional bonus systems — usually doled out once a year, solely based on quantitative goals, decided by a superior — have little to no positive effect on individual performance. That’s because they are based on extrinsic motivation, meaning that once a roof is overhead and food is on the table, money doesn’t motivate people to go past the bare minimum required to earn their salaries.
Bjarte Bogsnes in Implementing Beyond Budgeting calls people who take stock in this antiquated practice “budget believers.” He says that they think that “By tailoring the system the right way, we can almost program people into doing what we want them to do.” HR and upper-level management then get together, often with a consultant or two, to draw up a convoluted formula for an annual magical motivator.
Under the current bonus system, it’s assumed that people won’t give their all just for their salary — “The tasks and environment we can offer is probably not motivating enough” — so we can “motivate” them once a year with this secret recipe.
Bogsnes continues with “By introducing a bonus to get something done ‘more of’ or ‘better,’ the focus naturally shifts from being just on the job and the task itself to also what you get for it. The bonus undermines some of the interest in the job itself.” Essentially, every time you implement the traditional bonus system, intrinsic motivation dies a little.
But, when your business is going well, this doesn’t mean that people shouldn’t share in the success of the company and be rewarded sometimes financially. It just should in no way be done with the current bonus system. There needs to be a new system.
New Rules for a Totally New Bonus System
In this day and age, so full of uncertainty, you should always guarantee a fair salary but you cannot guarantee a regular bonus. Not only can your company probably not afford it, people receiving pre-assumed bonuses don’t have any extra motivation and, well, it’s kind of like giving an award for sixteenth place.
That’s why Appelo created the Management 3.0 new rules for a modern compensation system:
1. Salaries should always be expected. Bonuses shouldn’t be.
2. Earnings should be based on collaboration, not competition.
3. Peer feedback is the main performance measurement.
4. Creative thinking can grow the compensation system, but shouldn’t take advantage of it.
5. Compensation can be used to nurture intrinsic motivation.
That’s why we at Management 3.0, like Bonusly, recommend and use ourselves merit money as a way to give out feedback that can eventually be turned into a part of a bonus structure.
Peer Pressure is a Dang Good Intrinsic Motivator
According to Bogsnes, “Across cultures, research shows that autonomy, belonging and mastering the job consistently is what people rate as most important. Money is way down the list.”
Beyond being statistically proven, this just makes sense. What, since junior high, has always motivated us more than money? Peer pressure. When we are a part of a healthy team, we’re not only self-motivated by our desire to do a good job and to advance our career, but we want to do right by our team.
Following the theme that having a sense of belonging is a strong intrinsic motivator and the rule that peer-to-peer feedback is essential, the allocation of merit money just makes sense in the modern world.
In our team, we get 100 points a month that we must give all out. Eventually, maybe quarterly, based on a combination of total merit money and our percentage of monthly commitment — none of our team works 100 percent for just this one project — we receive financial bonuses, when the company has the money to give them out.
And because one of the plethora of problems with the popular bonus systems is the sense of secrecy, everything we do is transparent. We are not only transparent as to who gets what percentage of points, but we have to give reasons for why we did or did not give those points to each team member. Of course, we are only a team of eight now. I am sure, as we grow, we will still implement the merit money system, transparently, but maybe not say why we aren’t rewarding folks.
Of course, if you are using peer recognition (and we think you should), you have to make sure that you use the right communication tools to make sure everyone knows what you’re planning to do and what you are actually doing. But that’s a topic for another day.