Guy Kawasaki recently blogged about an article he found on Science Daily, which stated that bonuses are better than raises at increasing employee performance. A snippet from the source article used summarizes the concept quite well:
“… simply spending more on employee pay would yield minimal results … the [analysis] results suggest that providing a strong pay-for-performance link for bonuses rather than raises had the greatest potential benefit, predicted to improve employee performance by nearly 20 percent.”
I was immediately reminded of another piece I have read which warned against incentive-based compensations. Sitting on my co-worker’s desk is the Joel on Software book, and although it has been months since I last read it, somewhere in the Managing Developers section is the article “Incentive Pay Considered Harmful” (web version is very close to the one printed in the book). I revisited the piece and was not surprised to find the following excerpt, taken from a reference article:
“… at least two dozen studies over the last three decades have conclusively shown that people who expect to receive a reward for completing a task or for doing that task successfully simply do not perform as well as those who expect no reward at all.”
I am mindful that Joel’s article focuses mainly on software or technical firms and their employees, however it is interesting to see that there is a conflict between the studies. I would come to a conclusion that the compensation method depends on the recipient and the field.
Personally I would like to have a compensation package with both a base salary and performance incentives. The bonuses would be determined by very specific performance goals. These goals should be black and white with a simple pass or fail criteria, similar to sports players whom may receive bonuses if they scored a certain amount of points, or played a certain amount of games. The hard part would be coming up with these performance targets, but it should be no problem if the manager and employee created the goals together, and mutually agreed on them.
This also has the added benefit of setting goals for employee and aligning him/her with what the company needs to do.