How Bad Bonuses Breed Disengagement

Story by Gemma Beasley / December 19, 2023

Bonuses work. When done right.

While variable pay plans have tremendous potential to accelerate results and incentivize top talent, without proper structuring and communication, they miss the mark. And they can cause confusion, frustration, and diminished morale.

Think of the star employee who worked 80 hour weeks only to receive a $50 holiday gift card. Or the team members arguing amongst themselves over who got paid what. Or the top performers who jump ship when their year-end rewards don’t stack up to what they know they’re worth.

To uncover the all-too common pitfalls that leave employees feeling frustrated rather than fueled, we ran a survey. Our findings revealed a striking disconnect between the potential of bonus plans and their actual impact on employee motivation and retention.

Bonuses Can Motivate, But Communication Falls Short

The potential for higher bonus earnings undoubtedly motivates performance, with 42% of surveyed employees reporting increased effort inspired by potential upside compensation. However, a startling 47% highlighted a glaring lack of transparency surrounding their bonus potential – receiving zero clarity into key calculations or progress tracking until the moment the check arrives.

This black box approach leaves staff guessing rather than grinding towards clearly communicated goals. And when finally delivered bonuses fail to meet expectations without context, employee frustration swells and perceptions of being undervalued intensify.

The solution requires moving beyond bonus size to improve bonus communication. Companies underutilize the performance potential of variable pay plans by failing to:

• Establish clear individual and corporate targets tying metrics to incentive payout tiers
• Conduct regular progress check-ins on achievement forecasts
• Explain final determinations, particularly any deviations from goals

Enhancing understanding of how employee performance feeds into earnings is essential to maximizing engagement and retention from bonus programs.

The Retention Risk

Of greater concern, 28% said subpar bonuses prompt job searching, especially when reasoning seems arbitrary. Employees view variable pay as a reflection of their value and rewards. Unclear connections between performance and payouts jeopardize retention.

Ultimately, opaque reward processes obstruct employees’ ability to connect their performance to appropriate outcomes. Our psychology innately seeks to establish clear causation between our work and the benefits received, so when that relationship seems disjointed or devalued, we grow frustrated and discouraged. Employees denied transparency to understand how bonus calculations directly link to their efforts are more inclined to seek opportunities at organizations that better recognize their full contributions. They pursue roles where hard work maps clearly to financial windfalls.

The lack of visibility into performance metrics, progress tracking relative to targets, and explanation of final bonus award decisions harms engagement and jeopardizes talent retention. Enhancing program transparency and regularly reinforcing links between employee effort and bonus outcomes are imperative for motivation and loyalty.

The Communication Cure

The resounding feedback from our survey echoed a common sentiment – employees do not seek exorbitant bonuses. Instead, they crave transparency into bonus calculations, clarity in expectations, and a thorough understanding of how their work influences payouts.

Here are 3 ways your organization can ensure your rewards system is hitting the mark:

1. Set clear goals

Well-defined targets mapped to incentive earnings are essential. Establish specific quantitative bonus goals on a quarterly or annual basis directly tied to corporate, departmental, and individual performance metrics. Design financial and non-financial goals across a range of timeframes that are clearly laid out and easy to understand.

2. Provide regular progress reviews.

Don’t leave staff guessing where they stand – set expectations for periodic bonus achievement check-ins, at least quarterly. Provide status visibility into metrics and projections based on trends, and offer coaching conversations to discuss maximizing their earning potential.

3. Explain your calculations.

Walk through exactly how corporate results, business unit performance, team metrics, and individual goals relate to payments, including any discretionary components. When payouts deviate from expectations, detail the factors that shaped decisions. Not only do these insights limit confusion and resentment, but they also provide valuable feedback and learning for the future.

Failing at these key steps wastes the motivating potential of your bonus schemes, and risks your top performers pursuing opportunities elsewhere.

The Bottom Line

Suboptimal bonus plans squash engagement and productivity gains that proper programs unlock. Yet few companies devote sufficient attention to its design and communication.

As a talent consultant, I support partner organizations in ensuring their bonus investments realize full motivational returns. I can help you address the core pitfalls revealed in this analysis – opaque processes that confuse rather than catalyze.

Hudson Cooper Search can support you through:

• Strategic goal setting tying bonus eligibility to clear growth metrics across roles
• Progress tracking technology and scripts to communicate rather than obfuscate
• Total rewards training explaining bonus formulas and managing expectations

With the right plans and communication, bonuses are motivating and fulfilling. With negligent execution however, they’ll erode trust and fail to deliver a return on your investment. So don’t leave the impact of your bonus systems to chance. Get in touch for specialist guidance to ensure your next bonus cycle pays dividends.

Categories: Leadership Insights

Tags: bonuses, Candidate attraction, Leadership