Science says Don't Give Bonuses to Bankers

Just back from Daniel Pink, who was speaking at the Wired breakfast at RIBA this morning about his new book Drive. The key message is that short-term financial rewards, like the banker bonuses, do not produce great performance.

The science on this is clear, he explained. The carrot and stick approach may have worked in 1850s management: As Dan Ariely explains in the March 2010 issue of Wired UK, "Bonuses can boost activity, but not the quality of the work."

One example is the candle experiment. People are given a candle, matches and a box full of tacks and are asked to fix the candle to the wall. The secret is to empty the box, pin it to the wall and put the candle in the box. This became interesting when experimenters offered rewards of 5% for being in the fastest 25% and $20 for being the best.

Those in the incentivised group took, on average, 3.5 minutes longer to solve the problem. The reward actually increased their 'functional fixedness' and got in the way of creative approaches.

Pink explained that studies of companies show that cultures based on high short-term bonuses result in poor long-term performance. Instead companies need to build intrinsic motivation based on:

Autonomy - Search for Mastery - Purpose

Contrast Microsoft's failure with its Encarta encyclopedia (Encarta is now just a dictionary and thesaurus) with the success of Wikipedia. Microsoft paid its contributors well and hired managers to ensure delivery on time. But it is Wikipedia, with its editors contributing for free on topics they are passionate about, that has become the encyclopedia of our age.

This is true of Open Source generally and the success of Linux, Apache and more. Pink emphasised the importance of feedback. Many of the programmers who get involved in these projects probably only get feedback once a year or so in their main jobs, at their annual appraisal. But in the Open Source world they get regular feedback and can build a real reputation purely on the quality of their work.

"Motivation is not something you can do to somebody else", explained Dan. The message is that to get the best results -instead of bonuses - give people control over the work, a sense of purpose and a chance to learn and develop. Could be straight out of the Happy Manifesto.

Great Workplaces lead to Commercial Success: The Evidence

I've been asked to write a piece for the Journal of Direct Marketing on whether there is evidence of there being a link between having a great workplace and growth and profits. This is some of what I found:

Research into the companies that appear in the best workplaces indicates there really is a close link between a great work environment and commercial success. An investment in April 2001 of £100 in the 23 publicly quoted companies in the 2006 UK rankings would have been worth £166 by 2006, compared with £132 invested in the FTSE All Share Cumulative or £125 invested in the FTSE 100. (Financial Times, May 18, 2006).

This was backed up by a Gallup 2006 study, of 89 organisations, which found that earnings per share (EPS) growth of organisations with engagement scores in the top 25% was 2.6 times that of organisations with below-average engagement scores.

The 2009 Macleod report to government, “Engaging for Success”, found a wide range of evidence indicating a direct link between employee engagement and business results. They defined an engaged employee as one who “experiences a blend of job satisfaction, organisational commitment, job involvement and feelings of empowerment”.Gallup’s research has identified 12 core elements of employee engagement that they believe predict performance. These range from knowing what is expected of you to having the opportunity to do what you do best, every day, having a supervisor who seems to care about you and staff feeling their opinions count.

• The Gallup 2006 study, of 23,910 business units, compared the results from those in the top 25% of engagement with those in the bottom 25%.
• Those with engagement scores in the bottom quartile averaged 31 – 51 per cent more employee turnover, 51 per cent more inventory shrinkage and 62 per cent more accidents.
• Those with engagement scores in the top quartile averaged 12 per cent higher customer advocacy, 18 per cent higher productivity and 12 per cent higher profitability.
  (Gallup, 2006)

MacLeod also quotes a global survey from HR consultancy Tower Perrins in 2006, based on surveys of over 600,000 staff in a wide range of industries. “Companies with high levels of employee engagement improved 19.2 per cent in operating income while companies with low levels of employee engagement declined 32.7 percent over the study period.”

One of the strongest correlations was in the area of innovation. “Fifty-nine per cent of engaged employees say that their job brings out their most creative ideas against only three per cent of disengaged employees."

Of course it could be the case that a strongly performing company leads to strong engagement, rather than vice versa. Marcus Buckingham, previously of Gallup and now behind the Strengthfinder approach, “concludes from various longitudinal studies that it is engagement that leads to performance, and this is a four times stronger relationship than performance leading to engagement. (Macleod Review 2009)

There are a range of clear benefits from engaged staff:

• 70% of engaged employees indicate they have a good understanding of how to meet customer needs; only 17 per cent of non-engaged employees say the same. (CIPD 2006)
• Engaged employees are 87 per cent less likely to leave the organisation than the disengaged. (Corporate Leadership Council 2004)
• 78% of engaged employees would recommend their company’s products of services, against 13 per cent of the disengaged (Gallup 2003).

Many of the best companies in the world know this. Microsoft and Google, for instance, have made creating a great workplace one of their key strategic priorities. They know it makes them more effective, more innovative and also more attractive to potential employees.