Most of us have been taught to believe incentive-based compensation (“bonuses”) to be an essential management tool. The widespread use of this in almost all industries around the globe is a testament to how entrenched a concept it has become. Enstoa tested this theory in 2013 by scrapping bonuses and can now confirm the practice is useless, even harmful. We grew revenue-per-employee by 40% within four quarters of making the change. It wasn’t an anomaly—our 2015 growth is solid and 2016 looks good.
In late 2013, I pulled up Marx on my Kindle in the hopes it would put me to sleep on a long haul BNE-LAX flight. After a few hours in his Communist Manifesto, it hit me that Enstoa—the company I founded in 2007—had a misconfigured compensation scheme.
The next day at the office, I asked two of my longtime colleagues, “What if we add the bonus quota to base salary for each employee and scrap the incentive comp system?” Yes and yes.
I trusted those guys, trusted my gut, and ignored weird looks and questions from business gurus, “How will you motivate the right behavior? How will you ensure people work hard? How will your company offer a competitive package for new hires? Your highflyers will leave without upside.”
Sometimes you need to ignore convention and try something new. Monetary reward in the form of bonuses seemed out of harmony with people’s underlying drives. People get out of bed in the morning and do amazing things at work because they are smart, driven, collaborative and proud people. They don’t wake up chasing that incremental bonus potential. Of course we all want big bank accounts, but as long as we are adequately compensated, that extra bit of money isn’t a motivation for everyone, especially creative talent that moves the needle.
I believe it’s critical that our work, our contribution, should have measurable impact. We also want to belong to something larger than ourselves and to be challenged up to—or just beyond—our capacity. We tolerate and embrace failure if it leads to even greater achievements. We relish success, especially team victories after prolonged perseverance, innovation and collaboration. These drivers have nothing to do with an incentive comp strategy.
Are we at Enstoa saying the use of bonuses to ‘drive behavior’ is effectively mismanagement? Yes, we are. The bonus concept is a corporate fantasy fueled by the huge bonuses paid out each year to a few lucky finance professionals. We see a $2 million bonus and believe the recipient’s behavior was influenced by the incentive. In reality, it comes down to luck as anyone knows who has tried stock picking. Sectors outside of finance are still influenced by the illusionary link between incentive comp and real work performance.
In lieu of a bonus program that doesn’t incite the right motivation, what about a stock option scheme? No question about it, all employees should have stock options. Every employee that works with a company longer than a year or so has his or her fingerprints on the future of the venture. The contribution doesn’t end with employment. It is lasting and needs to be reflected in a stock options program. I’m personally very happy to have so many former employees of Enstoa who are now shareholders.
When it comes to employee morale, bonus schemes have a lot of downside and little upside. Underperformance and the corresponding disappointment far outweigh the joys of some extra bonus money. Bonus programs also suck a tremendous amount of management time, energy and focus at the cost of other growth activities.
The real drivers of performance are paying people at or above their value in the marketplace, giving them an opportunity to have a lasting impact, providing a platform to exercise individual capability, fostering team spirit, and ensuring a collaborative environment to achieve the remarkable.
@jordancram | Twitter