Why most bonus systems actually demotivate employees

Merit Money

Welcome to one of the most controversial topics in management: Who should be paid what.

Paying people for work without destroying their motivation is one of the most difficult challenges for management and regrettably, most compensation systems are considered unfair by employees and unscientific by experts. That’s why it would be wise to consider some lesser-known alternatives that are based on real merits instead of imagined performance.

How can we use bonus structures that can actually encourage intrinsic motivation?

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Normally bonuses are allocated by performance ratings, job title or job role, salary, overtime or another variable, each worse than the last. Decades of research have confirmed again and again that traditional bonus systems rarely have a positive effect on people’s performance when they are involved in creative knowledge work. As far as a flat compensation system goes, it doesn’t address the challenge of paying employees what they really earn.

At Management 3.0 we promote and follow the merit system, with these constraints:

  • Salaries should always be expected, Bonuses shouldn’t be: Always keep bonuses a surprise. When bonuses become frequent and anticipated, they ought to be converted to regular salaries.
  • Earnings should be based on collaboration, not competition. When determining how much people should earn, the main criteria should be their collaborative work toward a common goal.
  • Peer feedback is the main performance measurement: Contributions to a shared purpose are best detected and evaluated by peers, not by managers. Only the whole system knows all the details
  • Creative thinking can grow the compensation system (not rig it.) Expect that people can (and will) game any system, and tap into that creativity by inviting and supporting it, instead of driving it out.
  • Use compensation to nurture their intrinsic motivation. Make money a reflection of people’s curiosity, honor, acceptance, mastery, and all other intrinsic motivators.


Martie Management 3.0

Learn more about Rewards & Incentives during a Management 3.0 Workshop and especially within the view on how to Energize People.


What’s key to remember however, is that the single most crucial aspect of a merit system is that every individual can only recognize the contributions of other people and that the opinions of all individuals have equal weight.

Nobody can claim to have the best definition of what performance is and what collaboration means. We should, therefore, use everyone’s opinion equally and everyone in the organization gets an equal share of the hugs, but every employee must give away his hugs to others.

Merit Money Tips

The money part of merit money is actually optional. If you leave it out, you simply have a great, continuous 360 degree feedback tool.

Some suggest reducing available points for people who work only part-time, but we believe everyone should have equal votes.

There are various systems you can use to do this. Our Management 3.0 team uses Bonus.ly

Have you already tried these Management 3.0 Tools & Practices?

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