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January 2012
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An Alternative View on Executive Bonuses

Executive pay and bonuses have hit the headlines again as we approach the bank bonus season, and politicians from all sides wade in to share their views on how and how much top executives should be remunerated. Rather than debate who is right or wrong, I’d like to share with you some research which provides an alternative model for how we think about the links between reward and performance.

 

The received wisdom has it that people will work harder and perform better if they are to receive a bonus that they spend on themselves. Yet there is also a growing body of evidence from the psychology research literature that shows that it really is better to give than to receive. But what does this mean for bonuses?

 

Michael Norton and colleagues asked this question, examining whether people who received a prosocial bonus (that they then spent on others or donated to charity) differed from their colleagues who received a personal bonus (that they spent on themselves).

 

Compellingly, they did.

 

In Norton’s first study, a group of Australian bank employees who were given a $100 voucher to give to charity reported higher levels of happiness and job satisfaction than their colleagues, who either received a $50 voucher to give to charity, or no voucher at all. Donating the company’s money to charity helped employees feel happier and more satisfied with their jobs. But what about their performance?

 

To address this, Norton’s second study looked at how prosocial incentives impacted performance. With a sample of Belgian pharmaceutical sales people, and a sample of Canadian dodge ball players, Norton found that prosocial incentives significantly outperformed personal incentives in their impact on team performance.

 

When team members received a prosocial bonus as distinct from a personal bonus, the performance of the team as a whole was significantly higher. For the pharmaceutical sales team, this computed to a significant return on investment: €10 spent on prosocial incentives returned a massive €52 in superior sales performance.

 

So, when it comes to thinking about how to ensure bonuses deliver performance, it seems that prosocial bonuses have the edge. Perhaps Vince Cable could offer a sizable donation to their favourite charity for the first FTSE 350 remuneration committee to adopt this approach?

 

Source: http://rady.ucsd.edu/faculty/seminars/2011/papers/norton.pdf

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