Wednesday, March 7, 2012

Warning: Cash-Based Performance Bonuses May Be Hazardous To Your Company's Health

How do you feel about cash-based performance bonuses? Are they a great motivator? A necessary evil? Do you offer them because every other employer in your market space offers them?

Did you ever stop and think about how cash-based performance bonuses impact your corporate culture?

There's one company that believes they can be counterproductive - and even damaging - to their culture of openness and collaboration.

Wooga, a German social gaming company, is structured around work teams that share knowledge at weekly stand-up meetings. Co-founder and CEO Jens Begemann says the work teams aim to share "all learning and secrets. That's this culture of openness. Almost all employees have access to almost all information."

Begemann thinks that cash-based performance bonuses would inevitably lead to teams measuring themselves against other teams, causing employees to "work a little bit against each other." If someone thinks it is beneficial for the company to send users from one game to another...then they should do it. If it's better for Wooga, they should do it. They should not just think about their own."

According to Antti Hattara, Wooga's Head of Studio, "bonuses can have a habit of encouraging tunnel vision, focusing more on personal advantage and creating a feeling of competition among colleagues. I like the way Wooga tries to steer clear of this."

So how does Wooga manage to continually bring in top talent and keep its employees motivated? It offers initial company shares, which it believes will keep employees committed to working for the firm. It also offers a healthy mix of other freebies and non-traditional rewards:

  • free coffee and beer;
  • creative work rooms with video game consoles;
  • funds for work teams to set their own office group decor;
  • choose-your-own computer hardware;
  • no dress codes;
  • budgets for work teams to have group dinners;
  • monthly paid dinners for four-person tables from various work groups, encouraging everyone in the company to get to know everyone else;
  • company-sponsored off-site parties when the company hits targets;
  • hosted internal development classes;
  • an educational budget of 1,500 euros per employee for conferences, classes or lessons related to work;
  • recognition of employee birthdays with signed cards and thoughtful gifts;
  • iPhones and iPads for Christmas for every employee;
  • recruiting perks like flat-screen TVs, cameras and iPads for employees who bring someone else into the firm.

Wooga is not alone in its views on cash-based performance bonuses. Markus Witte, CEO of Berlin-based language startup, says "we don't think [the performance bonus] works so well. My experience is that money is not so motivating on its own. It's more about freedom, being able to do the things you want to do."

How well is Wooga's compensation strategy working? It seems to be fostering the kind of openness and collaboration they need to grow. The firm saw 185% user growth in 2011 to 40 million monthly users, up from 14 million in January 2011. That ranks Wooga as the third-largest social gaming company on Facebook. They plan to almost double their staff this year, hiring 100 more employees.

Retention doesn't seem to be a problem for Wooga, either - HR chief Gitta Blatt says only a very few employees have left the company and it's largely for personal reasons, such as relocation.

Wooga's philosophy seems to be working for them, but it may not be for everyone. They're a relatively small company with only 150 employees, and they're in a market space known for its quirkiness. Free beer, for example, is probably not an option most companies would be chomping at the bit to consider. In larger organizations, it may not be feasible for every employee to get to know every other employee. A no-dress code policy may not work when employees have constant contact with clients and the public, or if work uniforms are required.

We could think of scores of reasons why Wooga's strategy wouldn't work anywhere else but at Wooga. But our time would be better spent thinking about how we can incorporate elements of that strategy to make our own organizations better. Ask yourself, what kind of culture do we want to create? How do we want our employees to feel about themselves, their colleagues, and the company in general?

Think about what makes your company - and your employees - tick. If you currently use a cash-based performance bonus, is it achieving the results you want? Are your employees really motivated by cash? Are there other other motivators that might be even more effective? 

Cash-based performance bonuses can be a zero-sum game - there's a certain amount of money in the bonus pool, and that pool gets divided up among the employees. The only way I can get an extra dollar of that bonus pool is if someone else gets a dollar less. This can foster an environment of inter-employee competition and a mentality of "every man for himself".

Is this the kind of workplace you want to create? I don't think that companies intentionally set out to create a culture of pitting employee against employee. It's counterproductive, from both a human perspective and a financial perspective. But the kinds of incentives we build into our compensation systems can create the very scenarios we're trying to avoid. Think about whether your incentives are encouraging your employees to compete with other players in your industry, or other employees in your company.

Stephanie R. Thomas is an economic and statistical consultant specializing in EEO issues and employment litigation risk management. Since 1999, she's been working with businesses and government agencies providing expert analysis. Stephanie's articles on examining compensation systems for internal equity have appeared in professional journals and she has appeared on NPR to discuss the gender wage gap. Stephanie is the founder of Thomas Econometrics and is the host of The Proactive Employer Podcast.

Thanks to Stephanie R. Thomas / Compensation Café


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