Wednesday, 20 January 2010

Do bonuses work?

a new book by Boris Groysberg, an associate professor in the organisational behaviour unit at Harvard Business School, entitled Chasing Stars: The Myth of Talent and the Portability of Performance, makes an intriguing point: maybe it doesn’t matter a great deal if RBS loses these people.

Wall Street and the City are wedded to the idea that success depends on the talent and flair of individual bankers, with David Buik, for instance, arguing that bankers deserve their cash because “it takes a very special combination of talents to work in the city. It’s a very special gift”. Groysberg’s analysis of more than 1,000 star analysts at 78 investment banks, and 20,000 non-star analysts at about 400 investment banks, suggests otherwise.

“Exceptional performance is far less portable than is widely believed,” he says. “We found that mobile stars [bankers who leave one company for another] experienced an immediate degradation in performance that persisted for at least five years. Thus their exceptional performance at their prior employer appears to have been more firm-specific than is generally appreciated. Financial compensation is a lever [in motivating success] but it is not the only lever and it is the most overused lever. Banks behave as if stars deserve and should appropriate all the value they generate, but stars without the companies they work for might not be stars.”

Which leads us to the other argument often made in favour of dishing out bonuses: the idea that lump sums are a great way to enhance performance. If you offer someone £100 to, say, compose an advertisement for a company, with a £150 bonus for doing a particularly good job, then he or she will do a particularly good job, right? But there is research to suggest that this is not necessarily the case.

In 2003 the Harvard academics Nancy Katz and Michael Beer asked more than 200 senior executives in more than 30 countries about their bonus intentions — only to discover that the vast majority of those executives thought that bonuses had little or no effect on how their employees or businesses performed.


BrianB said...

I have no experience of working in the private sector, and least of all in banking. But the experience gained in my four decades in the public sector suggests strongly that the vast majority of people work to the best of their ability all the time and that paying bonuses doesn't affect that. I once asked a very senior executive of a big steel company whether his young managers wouldn't bother to work hard if they weren't offered bonuses for specially good performances -- and if not, what was the point of bonuses? He couldn't devise an answer to this. The other flaw in the personal bonus system is surely that most outstanding successes in private, non-profit or public sector work are the products of team-work, to which many employees will have contributed, and are not attributable to any single individual.


Tom Powdrill said...

Hi Brian

I agree that financial incentives have little effect on many (most?) people's motivation. Have just blogged on just this issue.

Personally speaking I worked by far the hardest when I identified strongly with the organisation's values and objectives. Money had little to do with it (I say 'little' because obviously I needed to be paid enough to cover house etc).