Why the psychology behind year-end bonuses is flawed

While most companies persist with the annual performance-linked bonus, some have offered incentives linked to exercise or body mass index
However, a better work environment and training, more respect, a recognition of employees’ efforts and revenue-sharing models can be as empowering as cold, hard cash

Kamala Thiagarajan

Published: 4:31pm, 29 Dec 2023

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The business world is no stranger to senior management making eye-popping, even eccentric demands on their employees, sometimes for the sake of their own health. Nowhere is this practice more evident than while handing out those coveted year-end bonuses.

A company in Guangdong province, Dongpo Paper, controversially cancelled its traditional annual performance-linked bonus for employees earlier this month. Instead, it said the year-end bonus would be spread across 12 months, but there's a catch: employees need to start moving.

If an employee runs 100km every month, they will earn 130 per cent of the stipulated monthly bonus. Running 50km will secure the full monthly bonus, whereas those who manage 30km will receive 30 per cent of the bonus.

“A company can last long when its employees are healthy,” said Lin Zhiyong, the company’s chairman, who is an avid mountain climber and who reached the summit of Mount Everest twice according to his WeChat account.

This has triggered debate on social media. While some admired the company for considering the well-being of employees to be critical to its growth, others saw it as controlling and even interfering with people’s personal freedoms and choices.

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Lin isn’t the first boss to promote such conditional incentives. In 2022, Nithin Kamath, the founder and CEO of Zerodha – an Indian firm which facilitates stock trading online – announced bonuses for his employees, but only for those with a body mass index (BMI) of less than 25. Those who made the cut would receive a half a month’s salary as a bonus.

Though Kamath said it was a “fun health programme” while announcing it on social media, the move came in for criticism. It was seen as body shaming, not to mention alienating for team members who were pregnant or battling weight gain as a result of genuine medical issues.

A Harvard Business Review report suggests such measures do little to motivate employees. Instead, a growing body of work suggests that offering incentives for achieving personal goals – such as losing weight, quitting smoking or using seat belts – is not only less effective than other strategies but is worse than doing nothing at all.

That’s because dangling this kind of carrot in front of employees only succeeds in achieving temporary compliance. It doesn’t provide the long-term commitment that is required for people to change entrenched bad habits. Worse still, while many of these measures seem well-meaning, they’re actively doing harm by promoting habits that are based on a lack of understanding of what constitutes good health.

For instance, BMI is not considered a reliable indicator of good health, and strenuous exercise is no guarantee of it for everyone. By tying these habits to financial incentives, companies risk misusing their power over employees.

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However, not all performance incentives are as quirky and controversial as these. Many are rather straightforward – cold, hard cash tied to increasing the company’s own bottom line. The logic is that if an employee works hard to help a company grow, they deserve to profit from that growth as well. In recent years, this traditional carrot-and-stick approach has also come under scrutiny.

The story of Enron, considered a leading energy and trading utility company in the United States until it went bankrupt in 2001, is one such cautionary tale. Enron’s executives were accused of employing accounting practices that falsely inflated the company’s revenues, making it the seventh-largest corporation in the United States.

It was later revealed that company’s work culture – particularly the way it motivated employees and its highly specific performance-based incentives – played a major role in setting the stage for its fraudulent accounting, one in a series of financial crimes that felled the company.

The Enron logo glows in front of the Houston-based energy trading firm’s headquarters in Houston, Texas, on January 9, 2002. Photo: AFP

Enron set up a ranking system, pitting employees against each other in a “survival of the fittest” setting. The overriding goal was building profit, creating an obsession with short-term earnings to maximise bonuses, even if workers had to step over friends and colleagues to do it. This mindset took the company from generating billions in revenue in 2000 to a shock bankruptcy just a year later.

While bonuses might encourage small bursts of success in the short term, this is merely an illusion. It can be disastrous if employees prioritise achieving these goals over long -term outcomes. It doesn’t help that year-end bonuses have morphed into wildly celebratory events, with some over-the-top antics becoming viral spectacles.

In January this year, a Chinese crane manufacturer from Henan province piled US$9 million in banknotes on stage and had employees carry away armfuls of cash. The event had money-counting competitions, with the winners rewarded with more cash. This was an aggressive display of company wealth at a time when many businesses were sinking with Covid-related woes.

However, the pandemic and the great attrition that came with it have shown many a corporate head that money alone can’t buy an employee’s loyalty. Studies have found that non-financial benefits can be powerful motivators, too, especially when employees feel more valued throughout the year as a result.

A better work environment, better training, more respect at the workplace, a recognition of employees’ efforts and revenue-sharing models can be just as empowering. They are a powerful reminder that a company’s growth is not just linked to rapidly rising salaries and fancy bonuses but also to lasting satisfaction.

Kamala Thiagarajan is a freelance journalist based in Madurai, southern India