Mo’ money, mo’ problems? Bonus incentives are backfiring and making some employees worse at their jobs

“We have this very old debate…that bonuses can actually backfire,” Dirk Sliwka, professor of management at the University of Cologne in Germany, told Fortune. “That you reward somebody for doing something and you actually achieve maybe even the opposite.” 

A 2023 study published by Sliwka and colleagues Timo Vogelsang and Jakob Alfitian looked at how cash bonuses impacted workplace absenteeism. Apprentices from 232 locations of a German retail chain were placed in one of two groups, either receiving an incentive of extra vacation days, or a cash bonus for showing up to work. While neither intervention affected absenteeism, the group that received monetary bonuses actually started showing up to work less often. To those employees, the introduction of bonuses for just showing up changed the expectations employers had of them.

“It’s pretty normal to come to work when you’re not sick,” Sliwka said. He explained that for workplace norms like simply showing up, you don’t need added incentives.

“In this sense, the bonus signals that it’s not normal,” Sliwka added.

Similarly, a 2022 study from Sliwka, Vogelsang, and Kathrin Manthei found that even managers are not immune from this phenomenon. The researchers sorted retail managers across 224 locations into three groups, and all were asked to look for ways for the company to increase profits. One group met bi-weekly to discuss ways to increase profit, one was promised 5% of whatever profit increase the company achieved, and the last group both attended the bi-weekly meetings and were promised a cash bonus. Only the group assigned to attend the meetings alone succeeded in increasing company profit. Even for the group assigned both the meetings and the bonus, the effect of the bonus wiped out the benefit of the meetings.

This dynamic extends beyond retail to professions where lives may be at risk. A decade ago, pay-for-performance models for U.S. physicians came under scrutiny for giving doctors bonuses for providing quality care for patients, which they could prove through thorough examinations and data collection or favorable results for the patients. But instead of encouraging doctors to perform at their best, the added incentive led some to refuse to treat sicker patients, fearing they would be unable to produce positive outcomes that would earn them the bonuses.

“The idea that everyone’s professionalism and everyone’s good will has to be bought with tips is bizarre,” healthcare economist Uwe Reinhardt told the New York Times in 2015.

Sliwka said firms have been increasingly approaching his team about collecting data on the impact of bonuses on workplace behavior. In the U.S., it’s no surprise why cash incentives can be a powerful tool. Walmart announced in June it would extend opportunities for bonuses to hourly employees, and Microsoft said in July it would give employees an extra one-time cash bonus, indicating extra pay could be a powerful tool for retaining employees in a competitive labor market. 

But the results of Sliwka’s research indicate that simply doling out cash to employees isn’t necessarily the key to a happy and productive workplace.

Why are employees cashing in but checking out?

The trend of backfired bonuses, while well-researched for years, has seldom been investigated outside of a lab environment, and has therefore been hard to apply to the workplace, Sliwka said. In addition to limited data, the pay-for-performance drawbacks have been muddied by well-documented examples of bonuses being really effective. Safelite CEO Tom Feeney even attributed bonuses as one of the reasons for the glass-repair company’s post-pandemic recovery. Some district managers at Safelite can earn 150% of their base pay through bonuses and make up to $250,000 a year.

Sliwka said there’s not enough research out there to fully understand how bonuses might positively or negatively affect employee performance in various workplace scenarios. However, the theory behind why bonuses have been backfiring for some is rooted in decades-old economic theory, and it has to do with what workers believe their employers are signaling to them. 

Michael Spence, an economist and Nobel laureate, popularized the concept of signaling dynamics 50 years ago, arguing that employers signal certain expectations and norms based on rewards, and employees likewise signal back their attitudes and expectations of themselves based on how they respond to those rewards.

Think back to the German retail workers getting cash bonuses just to come into work. The added reward reset the expectations for those employees: Just showing up to work was no longer the baseline expectation. Sliwka found an even more surprising reason for those managers getting a cash incentive to improve company profits, yet failing to do so. Managers promised a bonus were less likely to report problems to the company to help it improve because they believed their suggestions would just be seen as motive to receive the cash incentive.

“The moment you pay people for something, it’s less clear for others” if a behavior was motivated by the goal of just making money or the goal of really helping a cause, Sliwka said.

For workplaces trying to improve employee performance without falling into this pitfall, Sliwka suggests introducing collective bonuses for teams, so the motivation to perform is rooted in helping out a coworker or reaching a common goal. He also said daily set-up meetings, where employees are asked to present their progress on a project or task, can keep them accountable without having to introduce pay for performance.

Sliwka isn’t denying there are cases where an individual bonus could work. But he warns that employees who receive cash incentive can second-guess the motives behind their own work, which can ultimately hurt their performance.

“[With] an individual bonus, there could always be this doubt: ‘Did I do that only because I want to advance?’” Sliwka said. “Which typically people don’t like that much—this perception of being the greedy guy.”