Management

The Best Bonus Is One You Can't Spend on Yourself


The Best Bonus Is One You Can't Spend on Yourself

Photograph by Reza Estakhrian

Financial compensation is a blunt way to incentivize people. That’s no surprise, but a couple things would seem to be hard to argue with: If you want people to do good work, pay them as much as you can and let them spend the money on themselves.

Recent behavioral research, however, has called both of these things into question. The psychologist Dan Ariely has run studies in which he found that offering people bigger bonuses to perform tasks actually made them do worse—once a bonus gets big enough, he argues, it actually becomes a distraction and a counterproductive source of stress.

And now a team of psychologists has found that a bonus makes us happiest if we’re not allowed to spend it on ourselves. The study (pdf), which is still a working paper, set out to evaluate the effect of what its authors call prosocial bonuses on team performance and happiness. A prosocial bonus is one whose recipient has to spend the money on a single, randomly chosen teammate. The teams in the study were sales teams at a Belgian pharmaceutical company and dodgeball squads at the University of British Columbia, where two of the study’s authors are on the faculty. Why dodgeball? Michael Norton, a professor at Harvard Business School and another of the study’s authors, explains it this way: “Can we strip it down to the silliest activity we can think of? I’m pretty sure dodgeball is pretty much the dumbest, simplest sport humans have ever invented.”

In pharma sales and dodgeball alike, Norton and his co-authors found that the prosocial bonuses made teams better. At the pharma company, by their calculation, each €10 ($13) bonus given to team members to spend on themselves yielded just €3 in increased sales—a net loss of €7. But a €10 prosocial bonus reaped €52 ($67.50) in increased sales. For the college dodgeballers, each $10 personal bonus led to a 2 percent decrease in winning percentage, while an equivalent prosocial bonus led to a 11 percent increase in winning percentage. Forcing team members to buy gifts for each other, the authors suggest, strengthened the bonds between them and helped knit them into a more cohesive unit.

The study fits in with a wave of research into the social dynamics and the psychological (and material) benefits of selfless behavior, and Norton and co-author Elizabeth Dunn have a book out this week, Happy Money, that lays out the research around such questions as these.

Norton concedes that the effect probably has limits. The bonus amounts in their study were small. If a company announced that its entire bonus pool was to be set aside for prosocial purposes, that would likely engender much more resentment than fellow feeling. “One of the reasons we made the bonus amounts so small is that small amounts don’t feel like they’re being taken from your bank account,” Norton says. And speaking from past Secret-Santa experience, I will say that there can be an opposite effect: A lame, impersonal gift from a colleague doesn’t exactly strengthen the workplace bond. But assuming the effect holds up beyond the world of drug salespeople and intramural athletes, the small size of the sums involved is encouraging. Companies wouldn’t have to allocate much to their prosocial budgets to have an effect.

“If I give you €15 ($19.48) for yourself, maybe you put it in your pocket and buy a coffee,” Norton says. “If I give you €15 to spend on co-worker Dave, you think about what to give Dave. Our sense is that it increases how much you care about your co-workers, how much you want to help other people when they ask you for help. These things are huge predictors of not only how much you like your organization, but also how well the organization performs.”

Bennett_190
Bennett is a staff writer for Bloomberg Businessweek in New York.

Steve Ballmer, Power Forward
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