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Big Bonuses Backfire

by Lee

Dan Ariely from Duke University had an interesting op-ed in the New York Times on Wednesday about the value of a big bonus (or lack thereof). His findings were based on research that found that individuals that were told of a potential large bonus for successful completion of a simple task actually underperformed those that were offered a much smaller potential bonus. In multiple studies, the researchers found that "as long as the task involved only mechanical skill, bonuses worked as would be expected: the higher the pay, the better the performance." However, "when [they] included a task that required even rudimentary cognitive skill, the outcome w...the offer of a higher bonus led to poorer performance."

This research potentially has huge consequences for our industry's compensation structures. Our most recent compensation study found that the average external wholesaler receives $280,000 in variable compensation on top of a $92,000 base salary. If the anxiety of a large bonus hangs over peoples' heads and leads to poor performance, or if people become complacent because they expect and are comfortable with receiving even just a portion of the large bonus, firms need to keep this in mind when structuring their comp plans. Paying commissions and/or bonuses monthly or quarterly as opposed to annually is a step in the right direction.

We typically recommend a significant bonus for distribution management, wholesalers, and National Accounts teams. While Ariely's research hasn't persuaded me to change these recommendations, it does underscore the importance of having clear metrics that are regularly assessed.