Many employers pay financial bonuses to staff to reward achievement towards goals set by management. They are often used in the recruitment process to entice new talent into organisations. In the short-term bonuses can have the desired effect however over time research indicates that they have less impact on performance and can even, in some circumstances have the opposite effect. Think of the 2008 financial crisis when it was thought that the culture of fat bonuses led bankers to behave recklessly.

One of the problems with bonuses is that they assume that everyone is motivated by money. But when we think of all the big innovators and entrepreneurs of our time, Steve Jobs, Bill Gates and Mark Zuckerberg to name but a few; all were intrinsically driven to achieve success through their passion, vision and self-belief as opposed to the prospect of money alone.

There is little doubt that money can be a demotivator when pay is low, and that employees want a reasonable amount of money in their bank accounts but monetary reward in the form of bonuses is generally out of sync with employees' underlying drivers. That said, bonuses can be well received by staff who look forward to some extra cash around holiday time but it's doubtful it is what motivates them in the longer term.  The entrepreneurs of this world get out of bed in the morning because they are excited about the opportunities available to them.  As a rule, people like to feel that they are fairly compensated, are appreciated at work and that they are part of a bigger picture working towards the success of the organisation and playing their part in that.

Bonuses can risk causing resentment. For the majority, the amount of bonus paid rarely meets expectation and in circumstances where an employee has been paid the same as their perceived lazy co-worker, the impact can be demotivating, curbing any desire to put forward our best efforts.

According to a CIPD report, ‘Show me the money! The Behavioural Science of Reward’, alternatives to financial rewards may be more effective in motivating staff. The report highlights that the key is having a flexible reward package that doesn't solely rely on money alone. It's about tapping into those intrinsic motivators that will vary from person to person. Timely, authentic appreciation is one of the most powerful motivators known. A simple, 'thank you' can go a long way.

Given that people are motivated by different things, at different stages in their life, the line manager plays an important role in determining what these motivators are. A broad-brush approach to reward is unlikely to be successful. Managers need to get to know their staff on an individual basis and communicate regularly with them.

The CIPD report goes further by encouraging organisations to reward people for their individual performance as well as their contribution to a specific team or the overall company’s success. This avoids an individualistic focus on performance when an employee's behaviour can be to the detriment of their colleagues. Having cohesion within the team, with everyone striving towards the same goal should encourage team members to figure out a way to make their job intrinsically interesting and rewarding. Making work intrinsically motivating requires highly engaged and creative managers who are unlikely to be motivated by incentive pay anyway. Perhaps this is the most compelling reason to consider ditching employee bonuses in favour of something more effective.

Useful reading:

CIPD Research Report 2015

The Problem With Bonuses

The psychology behind performance-based bonuses is total bunk