Stop Giving Employees Cash Bonuses

New research suggests a better kind of year-end reward.

Stop Giving Employees Cash Bonuses
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A Christmas Carol makes a strong existential case for year-end bonuses, but it’s far less instructive on which type of bonus works best. Indeed, the evidence on that count is conflicting. Individual, performance-based bonuses can boost morale at the cost of coworker competition, while team-based bonuses can elevate cooperation at the cost of free-loading. It’s enough to make you wonder whether Scrooge wasn’t so much a miserly old crank as a frustrated manager.


Recently, a group of psychologists arranged for an Australian bank to give some employees a year-end bonus in the form of a voucher that could be donated to the charity of their choice. Afterwards, the researchers found that workers who’d been given a $50 charity voucher were significantly happier than they’d been before the bonus–both overall and with their jobs in particular. Happiness levels in workers given a smaller voucher ($25) or no voucher at all, meanwhile, stayed the same.

The study has its drawbacks–most notably, none of the workers received money for themselves–but it fits with an emerging line of research suggesting that paying it forward really does make us feel better. “We think that, in fact, people have an innate proclivity to experience joy from giving to others,” says Elizabeth W. Dunn of the University of British Columbia, a collaborator on the bank research and a co-author of the recent book Happy Money: The Science of Smarter Spending.

Dunn and others (primarily Michael I. Norton of Harvard Business School) call this effect “prosocial spending.” Their research has found that giving random strangers money and telling them to spend it on someone else makes them happier at day’s end then those given the same amount of money and told to spend it on themselves. The benefits of prosocial spending appear nearly universal: it’s been documented in countries rich and poor alike, and is even found in toddlers too young to know the meaning of money.

“Giving to others isn’t just a luxury that’s reserved for wealthy people who have more money than they know what to do with,” Dunn tells Co.Design. “In fact, all of us can benefit from using our money to help others.”

Companies as a whole can benefit, too. In connection with the Australian bank study, Dunn and collaborators also tested the impact of prosocial spending on team performance in a business setting. They gave some salespeople at a Belgian pharmaceutical company $22 to spend on “a bill, expense, or gift for yourself.” They gave others the same amount of money to spend on someone else randomly selected from their sales team.

In a recent issue of the journal PLoS ONE, the researchers report that sales teams that received the prosocial bonuses increased their job performance significantly (measured by sales), whereas the teams that received personal bonuses showed no improvement. In less abstract terms, the firm got a $3 return on investment for every $10 it gave in personal bonuses, and a $52 return for prosocial ones. Altogether the work suggests that the best year-end bonus–for the well-being of both employee and company–might be the proverbial “gift of giving.”


Dunn knows her findings can seem almost impossibly wholesome, but she says it’s “not all quite so Disney” when you dig into the details. One recent study, for instance, found that people needed to see the positive impact their generosity had to get the emotional payoff. “It’s certainly not the case that giving always, inevitably produces happiness,” says Dunn. There’s also a perfectly self-serving evolutionary reason why giving might produce personal benefits: groups that sacrifice for the whole may ultimately be in a better position to survive.

Of course, there’s not enough research in the world to make the idea of prosocial bonuses an easy sell around the office. People are inclined to believe that money will make them happy (Dunn is the first to admit that, up to a point, it does). We’re also inclined to think that spending on ourselves will feel better than spending on others–and many test participants predict just that before an experiment. “We have the economic intuition that we’d be better off using money to benefit ourselves,” says Dunn, “but in fact our research suggests the opposite.” How about that for humbug.

About the author

Eric Jaffe is an editor at CityLab, where he writes about transportation, history, and behavioral science, among other topics, through the lens of urban life. He's also the author of The King's Best Highway (2010) and A Curious Madness (2014).