3+1 Is More Than 4, The Science Behind Paying Bonus or Incentives To Employees!


Employee Bonus

Let’s just say history was re-written when TCS announced a whooping Rs.2,628 crore one-time bonus to all it’s 3,19,656 employees on the occasion of turning 10! Employees who completed service of 1 year or more were given bonus equivalent of one week’s salary for every year of service. With this huge payout, Business Insider reported “TCS takes a hit where it hurts” because though their net profit was up by 13% rise (Rs.24,219 cr), the after payout profit showed a 27% decline (Rs. 3,858 cr).

Undoubtedly under the TATA umbrella, TCS is the highest profit churning venture, so this huge payout is a highly commendable one. It’s no easy task to give away Rs. 2,628 cr at the cost of dwindling revenue to show. With an average take home of a mid-level software analyst amounting to Rs. 85,000, we can only imagine the top personnel bonuses running into lakhs and crores.

On other thoughts, TCS hogged the limelight for having cut it’s workforce substantially just this year. Was this bonus, a damage control measure? we’ll never know. Many of it’s co-players like Infosys, Tech Mahindra, Accenture, Microsoft etc also pay reasonable bonuses year on year.

If you thought India Inc was the only one handing out some handsome cheques, wait until you hear about Savjibhai Dholakia, chairman of Hari Krishna Exports (finished diamonds supplier). Even though the diamond polishing industry hasn’t seen much growth in the recent years, “kaka” (as they call him with respect) rolled out 500 Fiat Punto cars, gave keys to 207 apartments and gifted 570 employees exclusive jewelry for his 1,268 loyal employees for their Diwali bonus 2014. It’s not the first gesture of a kind, Kaka built an on-site kitchen for his staff, distributed helmets to all his employees who drove bikes and devised a £100,000 insurance to his long staying employees.

“We have gyms and the family programs, we have the freedom to meet the management with our suggestions, there are drop-boxes located on each floor to receive our ideas. It’s like a family- I wouldn’t dream of leaving” says an employee.

So does that mean more money, better performance?

Saying so, it has become a tradition to pay employees some kind of an incentive, but does that really win his loyalty. Many studies have confirmed that non-monetary incentives such as appreciation, innovative perks etc have a more profound effect on the employee’s productivity. But however one cannot deny that giving only non-monetary incentives serves in winning the employee’s loyalty.

More money means better performance only if the incentive is paid the way it has to be paid counts, irrespective of the amount of incentive. Harvard Business school conducted a study to see if employees work harder for higher pay which involved Harvard professors and colleagues Duncan Gilchrist, Michael Luca and Deepak Malhotra. The trio hired 266 workers segregated into 3 groups to do a data entry job of 4 hours on oDesk.com for a basic wage of $3 per hour. The groups were not aware of the study being conducted on them and none of them made more than $3/hour in their day-to-day activities.
Let’s evaluate the work performance and the value added by each group

Name of group Technique used
A Base wage rate agreed on: $3/hour
B Base wage rate agreed on: $4/hour
C Base wage rate agreed on: $3/hour
Unexpected incentive given during their work: $1/hour

Which of these groups do you think out performed? Did you say B and C?

The answer is C. Let’s find out why,..

Malhotra said, “ employees who were promised $4 worked no harder than those who were promised $3. Even if someone is paid $4, there may be no reason to interpret it as gift, because the workers assume that is the “going rate” for this type of work. The group C brought the most productive results. It’s members were initially offered $3/hour but received a surprise $1, so the additional dollar was perceived as a gift. The group figured, that we had done something nice for them which they wanted to reciprocate”

These findings mean “$3+$1 is more than $4”. He concludes, “Think carefully not just about what to pay employees but also how to pay them”

That’s exactly what TCS and Hari Krishna Exports did…

Another important thing is to make sure your incentive pay does not look like the SENSEX graph during the Harshad Mehta scam, where the stock market took to new highs and also fell hard when the scam cooled off.

Now Cognizant wants to cut it’s bonus pay, irrespective of the factors that lead to it, it’s employees were happier last year. The bottom line is to not raise your employee expectations by paying them spoonful today because they will expect a handful next year, and if you cant deliver, your reputation as an employer is at stake.

Summing up…

Sivaram Parameswaran observes, “ Sometimes we forget why we pay people. In compulsion to stay on par with other players, we lose track of real value and performance”.

It is known that the cost of retaining the mid-level manager employee is way cheaper than hiring a new one, so keep the employee incentive satisfied! The performance-related-pay or the PRP is what many companies practice today, not to forget gifting them iPhones, fully-paid-vacations-abroad, cars etc. The right mix of perks and incentives can bring out best performers.

[Image Source: Shutterstock.com]

  1. Bill Fotsch says

    I appreciate your article on incentives and your reference to HBS, my alma mater. There are some other HBS studies that I think you might find interesting. A much more effective form of incentives comes from making the economics of a business transparent, involving all employees to understand share in the improve d. The trust and focus on the common good captures the employees’ hearts while the information captures their minds. Commonly referred to as Open-Book Management, this creates an empowered, learning organization.
    I have seen this work in 400+ companies I have worked with in the past 20+years, from small / medium sized companies to larger publicly traded companies like Southwest Airlines and BHP Billiton in Australia. If interested, these Harvard Business Review articles provide more background:
    Are you familiar with open-book, and if so, are you a fan? I am looking to work with an India based company, so if you know one that might be interested, please let me know.

    1. Vaishnavi says

      Hey Mr Fotsch,

      Firstly thanks for taking the time to read and imparting such valuable information through your comment. I’m glad this article has been of some help to you.Also thanks for providing the links, now I know more about the Open book management approach and your articles just opened a new perspective.

      Thank you


  2. Vaishnavi says

    Hey Deepu,

    Thanks for those kind words, I’m glad you liked it.


  3. deepu says

    Interesting article, a new outlook on the incentives….

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