Profess Hsee of BoothMy 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.


“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