Bonuses vs. Overtime
Tue Sep 17 2024
I was recently shaping remuneration policies for a tech services firm and wanted to remove overtime in favour of bonuses. One of my closest colleagues - and also my business partner - was against. It was an interesting discussion I mulled over for a while and here are my conclusions.
Pro overtime
- If the employee works over their contracted hours for a client, they should capture some of that reward. Overtime is a ‘transparent’ way of doing this.
- The delay between extra effort and its compensation is reduced.
- Bonus allocation can be opaque and therefore appear to be - or actually be - political.
Pro bonuses
- Hours worked does not always equal client/company value. An annual bonus allows managers to better weigh up the quality of contributions over the last year.
- They compensate employees for harder to measure efforts beyond simply billing client hours.
- Overtime creates bad short-term incentives to bill the client for more hours. I’m reminded of a story - either John Hoskyns or Lee Kuan Yew - of how garbage collectors got paid 4x wages if they worked holidays. They’d avoid collecting rubbish in the run-up so there’d be extra demand for their services during holiday periods.
This last point is the one that swings it for me. Charlie Munger said it best:
“Never, ever, think about something else when you should be thinking about the power of incentives.”