Conventional wisdom states that one of the best ways to motivate employees is by paying generous bonuses. The media constantly highlights the huge bonuses paid to CEOs and other top executives. Organizations spend millions of dollars every year on bonuses. But is there evidence that bonuses are actually the best way to motivate employees?

Bonuses and Motivation

While it might seem obvious that bonuses drive employees to work harder, the research on this point is far from clear. Recent findings suggest that people are more driven by engagement than by financial rewards. This is a paradigm shift for many business owners and managers. The perception is that it’s far simpler to pay someone a bonus than to analyze something like employee engagement.

Research has uncovered that, in certain situations, bonuses can actually be detrimental to performance. A large bonus may motivate people so much that it causes stress and less effective results. That’s because being overly motivated stimulates certain brain centers that cause people to make mistakes. In this type of situation, bonuses actually do succeed in motivating people but may decrease effectiveness.

Bonuses may also foster a competitive spirit in the workplace. This is a mixed blessing. While competition often helps motivate people to do their best, it can also create hostility and divisions. When people are competing for prizes such as bonuses, it’s natural to perceive others as competitors rather than fellow team members. While a certain amount of competition is healthy, when significant monetary rewards are at stake it may undermine other values such as team spirit and the good of the company as a whole. When people do their best because they feel engaged, there is more of a feeling of camaraderie among employees.

Why Engagement is Important

There are many reasons why businesses need to make engagement a priority. Engagement is difficult to quantify but easy to recognize in the workplace. While employees may say or even believe that they are mainly working to earn money, their performance shows otherwise. Studies show that companies with engaged employees have 51 percent higher productivity.

Both Engagement and Bonuses are Effective

Both bonuses and engagement are effective motivators, and the two are not mutually exclusive. The Havas agency network connected the two by tying executive bonuses to employee engagement levels. There are other innovative ways that bonuses and other financial incentives might be connected to employee engagement. For example, bonuses might be paid to the team rather than individuals, removing some of the unhealthy competition between employees.

True employee engagement is a complex web of small connections between an employee and an employer, including frequently discussed efforts like flexible work hours, entertaining company events or pet-friendly cultures.  These can all be important factors of engagement, but a true connection between an employee and his workplace comes down to communication: feeling heard and feeling empowered to speak up.