Why you shouldn’t have a bonus plan
24 October 2025
I’m not here to tell you to delete your organization’s bonus plan.
Truth is, it’s probably not doing much harm. So, if you have one—and if your team seems to like it—you should probably leave it in place.
My message is that you shouldn’t have one.
I’m here to question the reasoning that preceded the establishment of your plan; or, more correctly, the assumptions that underpinned that reasoning. If I can convince you that you shouldn’t have a bonus plan, I’ll have rewired your brain a little and (hopefully) equipped you to build a more robust organization, even if you leave your bonus plan in place.
Why we assume a bonus plan is a good idea
There are two common justifications for a bonus plan.
There’s the desire to share the success of the enterprise with employees, so that they will feel connected to the mission, or to put it less charitably, so that they will feel like they have skin in the game.
And then there’s the desire to incentivize peak performance.
When bonus plans backfire
On occasion, bonus plans cause the exact opposite of the intended results. Here’s what failure looks like.
Employees like the idea of the bonus plan when it’s first introduced, but because the benefits of the plan are only loosely coupled to the behaviors management is looking to encourage, there is no sustained behavioral change.
At some point in the future, a bonus is paid, and this bonus is a welcome surprise. From this point on, a similar bonus is expected. Employees factor it into their earnings. It becomes an entitlement.
If for some reason the organization decides to pay a smaller bonus in a future period—or worse still, no bonus at all—employees react with vitriol. From their perspective, because they have come to regard the bonus as part of their earnings, they have just been defrauded by management. (They know they haven’t, but they feel like they have.)
Of course, this has a predictable effect on workplace productivity.
Now, I want to be clear. This is a worst-case scenario. I’m confident that your plan has been designed to mitigate this undesirable outcome, and I certainly hope that your careful planning pays off.
Lessons from failure
If an organization is growing consistently, it’s easy to assume that every element of the organization is contributing to that success. The culture, the work-from-home policy, and, of course, the bonus plan!
Under these circumstances, it’s almost impossible to diagnose the cause-and-effect relationships between various initiatives and the organization’s success.
But, in times of failure, these causal relationships are laid bare.
Should optimal behaviors be optional
Let me start by challenging the peak-performance assumption: the assumption that bonuses cause an improvement in individuals’ performance and that the organization benefits from these collective improvements.
It’s important to note that when executives talk about improved performance, they are not talking about extraordinary performance during extraordinary times (black-swan events, in other words).
The assumption is that bonuses cause (either directly or indirectly) an incremental improvement in employee behaviors. Employees will work slightly harder or pay slightly more attention to their work. The question that needs to be asked is whether the success of the organization is proportional to the incremental efforts of employees.
The answer is no. An organization succeeds when it consistently does a small number of things materially better than its competitors. The success of an organization is the result of a superior business model and consistent execution. It’s not the result of hundreds of employees striving for peak performance.
Amazon delivers your parcels on time because the entire organization is designed around incredible availability and speedy delivery. It’s designed to ensure that your parcels arrive on time, even if employees are having a bad day.
Now, it’s true that in every organization, employees will be required to sprint from time to time to compensate for any number of undesirable events. But consistent organizational performance requires that sprint capacity be built into each department. It also requires employees to understand that sprinting, when necessary, is part of their jobs.
Employees need to understand that optimal performance is like a relay race. You relax when things are quiet, and then you sprint when someone passes you the baton. This is (or at least it should be) the true nature of work. This, in other words, is what each employee’s salary is paying for.
An organization that needs peak performance from employees to succeed is a poorly designed organization. And a manager who thinks it’s ideal to try to coax peak performance from their subordinates is a bad manager.
Skin in the game
I love it when an executive attempts to defend their bonus plan by claiming that it causes employees to have skin in the game.
A bonus plan is the exact opposite of skin in the game. An employee has skin in the game when they have purchased stock in the company. A bonus plan distributes earnings to employees without requiring that they incur financial risk.
A fundamental principle of our economic system is that salaries are a reward for labor and dividends are a reward for financial risk. Because a bonus plan distributes a percentage of earnings to employees, it’s an attempt to do an end-run around this principle.
It’s not clear to me that employees benefit from the blurring of the line between labor and financial risk. To my mind, a better approach is to pay employees well for their labor and then encourage them to invest a percentage of their income in stock.
Commitment to the mission
It is true that we want our employees to be committed to the organization’s mission, but we should probably assume that this is their natural state.
No healthy person wants to devote the lion’s share of their waking hours to an organization that is prosecuting a mission they don’t believe in. In fact, there’s evidence that employees will find a way to justify even the most questionable missions just so they can feel committed!
So, if we observe that employees are not committed to the mission, rather than asking what we should do to create commitment, we should be asking what is it that we did to destroy it?
Fortunately, in my experience, the actions managers take to create unpleasant workplaces are the same ones that damage organizational performance. This means that if we focus doggedly on improving the performance of the organization, we will naturally eliminate the inhibitors of commitment and allow employees to re-engage with the mission.
The idea that cash bonuses will cause disenfranchised employees to re-engage is exactly as silly as it sounds!
The success framework
If I manage to convince an executive of my position (and more often than not, I don’t), the next question is, what should the bonus plan be replaced with?
The short answer is to pay generous salaries and then encourage employees to invest a percentage of their income in the organization’s stock.
The longer answer is that you should do this, in addition to ensuring that your organization is engineered for success. If it isn’t, you will probably struggle to pay those generous salaries.
We’ve already touched on the framework for success.
You need to design your organization to do just a few things (maybe just one thing) materially better than your competitors.
You need to design each department so that it can consistently make the necessary contribution to this mission. This means that you need sufficient slack to easily absorb normal variability.
You need to help employees understand that sometimes they relax (you have slack in the system, remember) and sometimes they sprint. This is the nature of productive work.
You should only request extraordinary effort from employees in the case of black-swan events, which, by definition, should occur no more than once or twice a decade.