Do Bonuses Work?

 -  1/22/13

There are 12 characteristics common to companies that successfully reward employees for the highest levels of performance.

Bonuses are controversial these days. Proponents believe that bonuses and monetary rewards increase productivity and organizational performance, while opponents state that bonuses create higher pay inequality — which leads to greater turnover — and that the long-term effects of bonuses do not seem unequivocally positive.

But in this debate, a key question is often overlooked: How important are bonuses to an organization’s sustained success? To answer this, look at the role they play in creating high-performance organizations (HPOs).

An HPO achieves financial and non-financial results that are significantly better than those of its peer group for five years or more by disciplined focus on what really matters to the organization.

The characteristics of high performance were identified as part of a study by research organization the HPO Center beginning in 2003. The findings were published in 2012 in Andre de Waal’s book What Makes a High Performance Organization: Five Validated Factors of Competitive Advantage That Apply Worldwide. The research included a review of 290 academic and management publications in the area of high performance and excellence. The HPO Center then organized the collected information and created a questionnaire that was distributed worldwide.

Approximately 2,400 respondents from 1,475 organizations in 50 countries filled in this questionnaire indicating how their organization scored on these characteristics and performed against their peer groups. Subsequent statistical analysis of the collected data showed there are 35 characteristics that have a direct positive relation with competitive performance. These characteristics always appear in five groups — the HPO factors. When an organization scores higher on these five HPO factors than its peer group, it also surpasses its peers financially and non-financially.

In 55 of the 290 studies reviewed, 12 potential HPO characteristics were identified with respect to bonuses and reward systems:

Fair reward and incentive structure: Employees must see that reward systems pay out a fair compensation, and the reward system should value the employees. Companies should make sure they know what motivates employees to excel — often equity is important to them. Satisfactory compensation and fringe benefits contribute to a sense of fairness.

Article Keywords:   compensation  

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