My CEO executive coaching clients frequently wonder how best to motivate and retain key employees. The question often takes the form of, “Should I give her an unscheduled bonus or a raise?” The business owner often tends toward a raise because it defers the cash outlay. My study of psychology recommends the bonus.
I have written about Professor Christopher Hsee of the Booth School of Business before. Recently he spoke explicitly about the bonus vs. raise question. “If you ask a typical employee, he or she will tell you they want the salary. But that’s because they don’t understand psychology,” Hsee said. “You should give them the bonus instead. Salary is stable and people adapt to the new salary level quickly. Bonuses are not as easy to adapt to.”
Hsee also supports my advice about giving a gift, particularly something the employee wants but might not indulge in. “Give somebody something they like but won’t buy with their own money,” he said. I particularly favor public luxuries, for example, theater tickets, dinners, trips, or electronics. The employee then gets to tell their spouse and friends who ask about the item that they are appreciated at work.
The other advantage of a bonus or gift instead of a raise is that a raise is permanent and becomes routine. The employee gets accustomed to that level of income and there is no going back for the employer. Worse still, you continue laying out the money each month but the employee no longer sees it as recognition or motivating. An unscheduled bonus is boost to happiness every time.
Addendum
“The reason why unexplained events have a disproportionate emotional impact is that we are especially likely to keep thinking about them. People spontaneously try to explain events and studies show that, when people do not complete the things they set out to do, they are especially likely to think about and remember their unfinished business. Once we explain an event, we can fold it up like fresh laundry, put it away in memory’s drawer, and move on to the next one; but if an event defies explanation, it becomes a mystery … and refuses to stay in the back of our minds. … Explanation robs events of their emotional impact because it makes them seem likely and allows us to stop thinking about them.”
–Daniel Gilbert
Stumbling on Happiness
pages: 186-189
Vintage Books a division of Random House, Inc.
Copyright 2005 by Daniel Gilbert
With just a bonus each year the employees income flattens out and actually decreases each year when you factor in inflation. Bonuses instead of salary increases only work in favor of the employer, and clearly demonstrates a lack of disregard for the employee. No employee can survive under this structure.
I can see how you might interpret my advice that way, Scott. Please take another look at my post. I suggest gifts and bonuses not as a way to minimize employee compensation but on the evidence that they maximize employee happiness. This assumes a fair and livable base wage and I understand that is becoming less common. Thanks for making that point.
If cost of living is given to all company employees annually, then per employer preference and what motivates each employee, a bonus and/or salary increase could motivate rather than the either/or of salary increase vs bonus.
Whoever wrote this must not understand psychology of human beings too deeply. If you assume the average human being is as smart as a dog then this structure will work very well. But smart people see right through the tricks of giving bonuses and gifts only. People look straight at the total increase in value for them. A pay increase is promise to pay more forever until one quits or gets fired, while a bonus or gift (don’t forget many people might actually prefer the money) is an transient increase that does not necessarily repeat. Assuming the same present value, an increase in pay is a stronger signal of trust and appreciation to the point as if to say “we like working with you so much that we want you to stay for years”. A bonus or an arbitrary gift without pay increase is saying “hey my cute little puppet, here is some treat for your good behaviors this year” .