Why big bonuses are bad news

Posted on: October 28th, 2009 by Reuben Turner

So it seems that, despite the credit crunch, the recession, the enormous borrowing, and closeness with which we’ve come to the very brink of economic collapse, it seems to be back to ‘bonuses as usual’ at the banks.

Is this a good thing?

No, but not just for the reasons you’d expect.

There’s a whole argument on farness and inequality which I could go into here, but I’m not going to. Unequal societies are unhappier, more violent and not necessarily richer. But that’s another blog post.

We’re all asking whether bonuses are fair.

We should perhaps be asking whether they actually work in the first place.

After all, a short-termist bonus-driven culture has got us where we are today. No wonder so many of us can’t understand why the banks and finance houses seem so keen to get back there as soon as they (read ‘we’) can afford it.

But the evidence before our eyes seems to be that bonuses don’t actually encourage better performance.

There’s a great deal of evidence to show that bonuses are very effective if you’re doing something pretty mindless, like digging out coal, or loading iron onto a railway carriage. But when you’re involved in the kind of subtle, complex, creative mental work that modern business demands of us, incentives actually make us less effective.

There’s a famous experiment called’ the candle test’ which pits people against a problem that can only be solved laterally. Time and again it’s been shown that applying incentives to the problem makes people drastically worse at solving it. You can watch a short TED talk by social psychologist Dan Pink about this.

Ironically the whole management science of motivation and bonuses stems from our industrial past, when men with stopwatches and clipboards would work out just how much bonus to offer other men to get them to lift and load heavy objects faster. (You can read an article about this enormous modern hoax here)

Is that really the same thinking we want to apply to managing the success of our entire economy?

Stop and think about it for even a second, and you don’t even need to consider the evidence. It just kind of makes sense, doesn’t it? If you’re offered a bonus that most people would consider to be an insane amount of money, you’re going to work towards the bonus, not the job. The reward, not the outcome. Fulfilling a set of arbitrary criteria, not doing a good job.

It’s the multi-billion-dollar equivalent of clockwatching.

And it’s not doing any of us any favours.