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Management 3.0 Practices: Merit Money

Why most bonus systems actually demotivate employees

Paying people for work, without destroying their motivation, is one of the most difficult challenges for management. 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.

We continue Jurgen Appelo’s, Managing for Happinesswith the most controversial topic in management: who should be paid what. First we talked last chapter about how to decide on a base salary, and now we are going to discuss how to use bonus structures that can actually encourage intrinsic motivation.

Normally, bonuses are allocated by performance ratings, job title or job role, salary, overtime put in, 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.”

merit-moneyThis chapter dives in and compares different bonus systems: the traditional annual bonus system versus a flat system (or no bonus at all) versus a merit system (like on sales teams). At Management 3.0, we promote and follow the merit system, with these constraints:

  1. Salaries should always be expected. Bonuses shouldn’t be.
  2. Earnings should be based on collaboration, not competition.
  3. Peer feedback is the main performance measurement.
  4. Creative thinking can grow the compensation system (not rig it.)
  5. Compensation can be used to nurture intrinsic motivation.

This chapter also explains how you can apply key compensation terms like virtual currencypeer recognition, and the true wonder of what is Merit Money. And you’ll learn the six rules of rewards to make sure the system doesn’t get out of control.

“Nobody can claim to have the best definition of what performance is and what collaboration means. We should, therefore, use everyone’s opinion equally.”

“Many authors make claims, but Jurgen Appelo delivers on them. He offers a combination of crisp, articulate thoughts in an easy, engaging read. If you’re looking for actionable advice that will help you build a better, stronger and more productive relationship with those you lead, then I’d highly recommend you read Jurgen’s book.” – MIKE MYATT, author of Hacking Leadership, a Forbes leadership columnist, and founder of N2 Growth.

Management 3.0 Experiences: more Merit Money tips & case stories:

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