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Bonuses won’t make your organization an HPO!

bonuses-and-reward-systemsOne of the biggest debates, among business people and scientist, is the role of bonuses and reward systems in becoming a ‘high performance organization’. Together with colleague Paul Jansen (Professor of Industrial Psychology at the VU University Amsterdam) I just presented at the European Reward Management Conference a research paper (The bonus as hygiene factor: the role of reward systems in the high performance organization) about this hot topic.

The first conclusions in this paper about bonuses as an hygiene factor:

“The literature review described in this paper showed there are twelve characteristics, found in research studies into high performance organizations, that have a bearing on the type of bonuses and reward systems that organizations can apply to achieve high performance. However, eleven of these twelve characteristics seem to have a minor role compared to other characteristics found in the literature review (which have to do, among others, with organizational structure, quality of management, quality of workforce, information technology and communication) and did not make the cut into the empirical study. In the empirical study, the remaining characteristic A ‘fair reward and incentive structure’ did not show a significant relation with organizational performance. The conclusion therefore is that using bonuses or implementing certain types of reward systems does not have a positive nor a negative effect on long-term organizational performance. A possible explanation for this result is that bonuses and reward systems are a hygiene factor for an organization. If the organization does not have an appropriate reward system, with or without bonuses, it will run into trouble with its employees. If it does, which employees expect and consider to be normal, it can start working on improving its performance.”

This research result puts the ongoing debate on the use of bonuses and reward systems to improve the results of organizations in a different light. Putting a lot of effort in introducing bonuses or a certain type of bonuses and reward systems and then expecting your organization to improve its results and maybe become an HPO is unrealistic. The bonuses and reward system is not a determining factor for long-term high performance.
There may be other arguments for designing a bonuses and reward system though. For instance, your organization should not differ too much from other organizations in your sector (Dimaggio and Powell, 1991) or, for equity reasons, internal pay dispersion should not be too large. The practical implication of this study is that your organizations should not spend a lot of time on designing and implementing elaborate and sophisticated reward systems to improve performance. You just have to make sure an appropriate bonuses and reward system is installed that is considered to be fair and equitable by employees. This creates a good foundation for building an HPO.
What do you think?

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