For a long time I have been aware of the fact that bonuses aren’t really a good motivator when it comes to improved organisational performance. Yet, I have been curious why what seems rational fails in reality.
Logically, you would think the promise of gaining more should propel every one of your employees to put in extra effort. But it doesn’t.
I regularly ask CEOs: “Does your “bonus pool” generate greater results for your company than if you didn’t offer a bonus.”
At first the answer is, “Of course!” as they intuitively think this has to be true. When probed deeper to quantify the impact of the bonus on organisational performance, a blank look appears on their faces as it dawns on them, that the promised gain does not change the way people work.
Well there is a good reason for this, according to behavioural scientists Kahneman and Tversky. Employees — well all people — have a mental defect called loss aversion, which is the tendency to strongly prefer avoiding loss to acquiring gains.
The desire to avoid anything that resembles loss is a powerful mental habit that shapes our behaviour. It’s so penetrating that it causes us to do foolish things.
A clear example of this is people buying bonds in lieu of stocks. Since 1926, the annual return on stocks after inflation has been 6.4 per cent, while the return on Treasury bills has been less than 0.5 per cent.
Over the long-term stock portfolios always generated higher returns than bond portfolios. So why would anyone buy bonds?
They have a distorted sense of risk. Bonds consistently perform, albeit at a low rate, while stocks erratically grow creating the opportunity for harm interspersed with the increase.
Loss aversion makes people irrational and as a result they chose bonds.
What is interesting is that bond investors argue that they’re really good at investing. They use the avoidance of loss as the reference point even when it’s a factually flawed argument. They’re confused about the relative safety of investment vehicles over the long haul. They think they’re choosing good performance when they really aren’t.
It’s the exact same in the workplace, people argue they’re high performers and striving for a bonus but actions show they’re trying to keep their job. Keeping a job is loss aversion (avoiding pain) whereas earning the bonus is acquiring gain.
The ticket to gaining a bonus is high performance, which requires taking risk. High performance isn’t easy to attain or you wouldn’t be willing to pay extra for it.
Frankly speaking, achieving high performance is breaking from the status quo. And anytime one of your employees does that he incurs the chance that it will fail, which is a loss.
This is the point when loss aversion sets in and your employees emotionally chose between taking the risk to get the “gain” or avoid the “loss”.
Given the exceptionally high number of expats in the GCC, for most of your employees the risk overshadows rational thinking. Rather than performing at this peak, they work to avoid losing their job. Please don’t confuse hours worked with high-performance. Many are hard but cautious workers. Losing a job here as an expat means losing everything.
Thus loss aversion trumps stellar performance.
Loss aversion is an innate flaw. Everyone who experiences emotion is vulnerable to its effects. It’s part of a larger psychological phenomenon known as negative bias, for the human mind bad is stronger than good.
There is no rational reason for this, but it is real.
The science of loss aversion says the pain of loss is twice as potent as the pleasure generated by a gain. This is why employees pick the avoidance of pain over acquiring gain.
That is unless the perceived gain is two times or more the potential loss. Thus why the bonus is a weak motivator when a bonus is just a few months’ pay.
To take advantage of this you need to learn to use your employees emotion rather than relying on rational arguments.
Framing the motivator as a loss or gain is an important determinant in raising your company’s performance level.
Typically, a bonus is perceived as something extra — do more get more. Perhaps, it should be thought of as avoiding a loss rather than acquiring a gain — if you don’t do more, you’ll lose your bonus.
This is just a thought on how you can overcome loss aversion.
— The writer is a CEO Coach and author, including of the ‘10 Tips for Leading in the Middle East’ and other writings. Contact him at tsw@tommyweir.com
