Cash-Based Bonuses the Cause of the Recession?

People Management recently asked: “Are Bonuses to Blame for Banking’s Downward Spiral?”

The article quotes the CIPD advisor Charles Cotton: “Bonuses have become a recruitment and retention tool rather than a reward for good performance. There are so many corporate governance issues around permanent salaries that the only ‘wriggle room’ has been bonuses. That’s why in recent times there have been sums that have been seen as excessive, and the phenomenon of people asking for guaranteed bonuses – degrading the principle of paying for performance.”

The International Financing Review recently published a report, “Strategic Risk and Reward,” which was also cited in the article: “Goldman Sachs has gone further than other investment banks in developing a multi-dimensional reward strategy and in emphasising loyalty through its culture, which might explain its relative resilience compared with rivals Lehman Brothers and Merrill Lynch.” (emphasis mine)

Cash bonuses and rewards have been the downfall of many recognition programs, and yet many companies continue to rely on them. In fact, Bnet author Joanna Higgins recently wrote an article: “Cash Is Still the Best Comfort in a Crisis.”

Why? Because employees say so? Surely HR professionals don't take employees at their word on other matters: “We don’t want more training, just save the money and spend it on a bonus”…yet we do invest in training and development. “We don’t want any benefits, just save the money and spend it on a bonus”…yet we do invest in benefits.

Not only has research shown that a “thank you” has more impact in driving results, but the promise of a bigger bonus in eight of nine tasks actually significantly decreased performance.

What does work? As the Strategic Risk and Reward report found: emphasise loyalty through culture. Use recognition tools that thank the employee for his or her efforts while also explaining why that exceptional effort was of importance to the company achieving a strategic goal -- especially when times are challenging.

What do you think about cash vs. non-cash bonuses? Tell me in comments. My next post will discuss in more detail the proper rewards.