Skip to main content

My first experience with incentive bonuses came after our company was acquired on the lip of a recession. When that downturn gained traction, bonuses disappeared. That didn’t matter for my long-standing colleagues as we had never benefited from them, but our new colleagues were furious that they were working harder than ever and not getting remunerated accordingly. It was a sign to me that something was rotten in Incentiveland.

Incentives are tricky. But too often corporate executives, often benefiting from bonuses themselves, succumb to magical thinking on incentives, assuming the reaction will be automatic – offer an incentive, and people will grasp for it, like mice in a Pavlovian lab experiment, and the company will live happily ever after. But humans are more complicated.

Some of the best insights have been piling up in behavioural economics studies. Of course, behavioural experiments are often with university students doing simplistic tasks and need to be received with caution but some research tries to replicate the work situation or is carried out within companies.

A study with bankers found evidence they put more money into risky investments when bonuses were at stake in a competitive situation, only the top producing ones being rewarded. “Once you’re in the rear, only taking higher risks offers you the opportunity to get to the front of the line and receive a bonus payment. Similarly, if you suffered losses, you can escape them more quickly if you take higher risks,” Matthias Sutter, director of the Max Planck Institute for Research on Collective Goods, writes in his fascinating book, Behavioral Economics for Leaders.

He warns not to use bonuses to offer incentives unwittingly to sabotage colleagues, which is a problem surfacing with relative performance bonuses. For many organizations, promotions, raises in salaries and bonus payments are made dependent on relative performance compared to others in the company. This creates competition for the best and most lucrative positions in the company. That fits the competitive ethos many leaders subscribe to but can unleash dangerous passions, as Mr. Sutter shows by recalling how the competition for the one position to skate on behalf of the United States in the 1994 Olympic Games led Tonya Harding to hire a hitman to injure her main competitor, Nancy Kerrigan.

In a lab experiment by Cologne University economics professor Bernd Irlenbusch, participants divided into teams of three employees and a boss to compete for a bonus they could win if they were the most productive employee. Instead of investing in their own productivity they could reduce the performance of the other two by destroying their work. The level of sabotage increased the higher the bonus.

Interestingly, communication between the three employees in the team lowered the level of sabotage. “When people know one another better, they are less likely to act in destructive ways,” Mr. Sutter says.

Various studies have shown people are more willing to lie to gain an advantage over another person. But again, there can be a relational retardant. If the damage becomes substantial to the other person, they are more likely to refrain from lying. In that vein, studies by Francesca Gino and Max Bazerman of Harvard Business School suggest that leaders should not tolerate minor ethical infractions because there can be a slippery slope of small-scale cheating leading to major corruption.

Paying people more doesn’t mean they will make better decisions. (Are you listening, boards of directors?) A laboratory experiment by famed behavioural economist Dan Ariely asked participants in India to figure out six different tasks that had to do with logic, creative thinking and cognitive and physical abilities. In one situation, they could gain 400 rupees per task, enough for a month’s typical purchases for goods and services in one hour’s work. You might expect that to produce the best work, but in fact it led to the most errors. And errors in decision-making can, of course, be costly.

A bakery with outlets across Germany that wanted to offer incentives to boost productivity experimented with a team bonus if certain sales targets were achieved because the performance of each person was hard to quantify. The executives were initially wary because they felt a team bonus would lead to freeloading behaviour.

The bonus was tried in 97 bakeries while a control group of 96 outlets in the same chain had no such payments. Sales increased by 3 per cent in the bonus bakeries – more in revenue than the cost of the bonuses – and after three months the idea was extended to all the bakeries.

Interestingly, the bonuses didn’t increase job satisfaction. Undercover shoppers didn’t find any difference in the frequency with which the bakery employees asked if they wanted anything else. It seems that the employees became more co-operative with each other to accelerate the sales process – one person handling the doughnuts and rolls, another the cash register – and in lulls they cleaned up the coffee machine and oven and prepared more sandwiches.

So next time you’re thinking about incentives, perhaps begin with how to encourage teamwork rather than individual competition.


  • Entrepreneur Nick Jain recommends the 30/30/30 rule: Spend 30 per cent of your day on your own tasks, 30 per cent teaching and developing your team and 30 per cent in self-development.
  • It’s not people’s job to show you what’s interesting or great about themselves, advises author Mark Manson. It’s your job to find it.
  • Columbia Business School strategy professor Rita McGrath says we have been trained to think of our economy as comprised of “industries” and within each industry competitive advantage meant that a firm did better than others that sell similar products and services. But in today’s environment the most significant competitor many players will strive to contend with may not even be in the same industry – Netflix considers their biggest competitor to be sleep. She suggests thinking in terms of competitive arenas, open territory different players are seeking to occupy.

Harvey Schachter is a Kingston-based writer specializing in management issues. He, along with Sheelagh Whittaker, former CEO of both EDS Canada and Cancom, are the authors of When Harvey Didn’t Meet Sheelagh: Emails on Leadership.