The Bonus System Trap: Structural Problems of Invisible Debt in Organizations

Structural Problems in Management Decision-Making

I want to share a conversation with a friend who is a business owner. He told me about his decision to provide bonuses because his company was starting to do well. While this is certainly something to celebrate given the company's success, I don't think the decision to give bonuses simply because things are going well is particularly good.

The moment I heard this decision, I felt a warning. What appeared to be an intuitively correct decision revealed serious structural problems when I analyzed the long-term impact on the entire organization.

What I'm clearly opposing is behavior that pursues short-term benefits while ignoring long-term consequences. Specifically, I want to raise concerns about the danger of overlooking problems that could be foreseen through structural analysis due to intuitive decision-making.

To avoid misunderstanding, let me clarify that what I take issue with is not the bonus system itself, but its design philosophy and implementation process. A properly designed bonus system that considers long-term impacts can be an extremely effective tool for organizations. The problem lies in the short-sighted decision-making process of "giving bonuses because things are going well." This is a structural problem common not only to bonus systems but to all HR systems, employee benefits, organizational management, and decision-making in general. Therefore, I want to use the bonus system as a case study to consider materials for long-term decision-making.

Invisible Debt and Visible Results: The Importance of Structural Analysis

We are familiar with the concept of "debt" in our daily lives. When you borrow money, you incur repayment obligations, plus interest. However, what's surprisingly not well understood is that organizations also incur debt with the same structure.

Organizations incur debt with the same structure as financial debt. What makes it even more troublesome than financial debt is that organizational debt involves unpredictable human emotions, making it extremely difficult to forecast and control its impact.

When I analyze my friend's decision structurally, this is a typical pattern of "organizational debt accumulation." It's a decision that prioritizes short-term employee satisfaction (performance improvement) while sacrificing long-term organizational flexibility (cost structure rigidity).

For those in technology, you can understand this as having the same structure as "technical debt." It's a decision that prioritizes short-term development speed while sacrificing long-term maintainability.

Fundamental Laws of Management: The Paradox of Short-term vs. Long-term Through Structural Thinking

I believe that most short-term benefits become long-term detriments, and this is very important. Conversely, most short-term detriments become long-term benefits.

This has the same structure as optimization problems—it's the difference between local optimization and global optimization. Methods that solve only immediate problems often lead to completely opposite answers from methods that optimize the entire system.

In corporate finance, which any business manager would learn first, enterprise value calculated through methods like DCF (Discounted Cash Flow) is computed based on lifetime profit generation. In other words, management is evaluated on something integrated over a "lifetime" timeframe, and naturally, it should be considered to maximize that value.

To put this more simply, management is a lifetime value optimization problem. So if pursuing short-term benefits results in decreased lifetime returns, that would be a wrong decision as a manager. The key is to maximize both short-term and long-term benefits within the constraints of the moment.

Japanese Corporate Conformity Thinking: Collective Convergence to Suboptimal Solutions

Returning to the bonus topic, what becomes a long-term detriment? Employees joined the company and agreed to work under conditions where no bonus system existed. Then, because the company's performance is good and there are surplus funds, a decision is made to provide bonuses. Since bonus systems are common in Japanese society (typically paid twice a year as seasonal allowances), some managers might decide to implement them thinking, "Other companies do it too, so it's natural for a Japanese company."

However, choosing actions based on "because others do it too" is a decision that ignores company-specific conditions and carries a high risk of significantly deviating from optimal solutions.

The Trap of Group Thinking: Abandoning Uniqueness

This follows the same thought pattern as the cognitive bias commonly seen in group psychology: "it's right because everyone does it." Instead of analyzing their own company's situation, constraints, and future prospects to derive optimal solutions, they follow herd behavior.

Rather, venture companies should be entities that question existing conventions and seek better methods. They have a mission to ask "Are traditional methods really correct? Isn't there a more effective way?" and change the world through innovative approaches.

Despite this, doing the same things as established large corporations and claiming "our company can also provide bonuses" is nothing other than abandoning the identity of being a venture company.

Of course, since this is important, let me clarify repeatedly that I'm not directly denying the existence of bonuses themselves. This is a problem statement about thoughtless short-term decision-making, and since many other things apply, please substitute with something familiar to you.

The Essential Purpose of Bonus Systems: Why Implement Them?

Let me pause here to consider: What is the purpose of implementing bonus systems in the first place?

Commonly cited purposes for bonus systems include multiple objectives: expressing gratitude to employees, strengthening motivation through performance linkage, talent retention strategies to keep excellent personnel, equalizing working conditions in competition with other companies, and creating mechanisms to share the company's good performance with employees.

Each of these purposes has its rationality. Particularly, purposes like "conveying gratitude to employees" and "rewarding hard work" are likely sincere feelings that many managers genuinely hold.

However, the problem lies in cases where the stated purpose diverges from the actual motivation. It's not uncommon for decisions to be based on completely different criteria while outwardly claiming they're "for the employees."

Managerial Vanity: The Moment of Losing Sight of Original Purpose

Why do such decisions arise? Even without strong demands from employees, managers themselves feel it's necessary and may be acting out of pride to maintain the appearance of a proper Japanese company. Of course, there's certainly considerable consideration for employees as well.

Paying high bonuses, holding company events at luxury hotels—do these really achieve the original purposes we organized earlier: "expressing gratitude to employees," "strengthening motivation," and "talent retention strategies"?

Isn't this just being used by managers to show off that they can provide such bonuses and hold events at luxury hotels?

This is a typical case of confusing purpose with means. The original purpose of conveying gratitude to hardworking employees has somehow been replaced by the true motivation of external vanity—being "a company that can provide bonuses" or "a company that can hold events at luxury hotels." Excessive means are chosen to achieve the original purpose, causing overall system performance to deteriorate. This is a typical organizational debt pattern caused by requirements definition failure.

The True Meaning of "It's Nice When Things Are Going Well" from My Best Friend

I'm embarrassed to admit that when I started my company, I also implemented many short-term measures to make employees happy. That's why this article contains a strong sense of self-reflection. I gave important roles easily with almost no consideration and raised salaries on a whim with expectations.

At that time, I was making important decisions without verification or preparation. If I had done the same thing in the technology world, I would have criticized myself, asking, "Are you really going to operate such an important system with such insufficient verification?" However, when it came to organizational management, perhaps due to lack of experience, I somehow lost the same level of caution.

What my best friend said to me then was: "It's nice when things are going well."

At the time, I couldn't understand the true meaning of these words at all. Performance was steady, employees were happy. What was the problem? I thought when things are going well, you can do anything. So these words might not reach you now either.

Reality Arrived During COVID: The Prophecy Fulfilled

Then, several years later, after going through the COVID period, the situation changed dramatically. I experienced things not going well. And at this time, I understood the true nature of the words "It's nice when you can do anything when things are going well."

At this time, things I had implemented with almost no consideration began to backfire. When I tried to reorganize and restructure people I had promoted based on expectations due to worsening business conditions, conflicts naturally arose.

This was a problem arising from inconsistency between past and present decisions. From their perspective, it was natural to question: "If my abilities were recognized during promotion, why am I now being told I lack ability?"

From my perspective, they hadn't met expectations, and there were rational management reasons for tightening due to the difficult business environment during COVID. However, once people are promoted, they're initially happy, but afterward, that becomes their normal state. I had underestimated this structural problem.

Human Cognitive Systems: The Reference Point Fixation Mechanism

To express this clearly, human cognition has a function of setting reference points. Once a reference point (position, salary level) is set, it's remembered as that person's "normal state." When that happens, demotion—even if it's where that person originally should have been—doesn't feel that way. You've probably heard that once people raise their living standards, it's hard to lower them.

Similarly, once promoted, people initially show modesty but try to fulfill responsibilities matching that position. However, after continuing in that position several times, their perception changes to see that position as naturally theirs.

Likewise, with bonus systems, even if people initially feel "grateful," as payments continue, the expectation that "this much is naturally receivable" becomes internalized.

This phenomenon can be explained by reference point dependency and loss aversion from behavioral economics. Reference point dependency means humans judge satisfaction not by absolute value but by changes from a reference point. That is, "past good states" are remembered as new reference points, becoming "normal states." Loss aversion is the human cognitive characteristic of feeling losses about twice as strongly as gains of the same magnitude. For +100 satisfaction from promotion, the loss from demotion is felt as about -200 dissatisfaction. When these two elements combine, the psychological impact of reducing once-given treatment far exceeds the positive effects when that treatment was initially provided.

Once set, expectations are permanently stored unless manually adjusted. And human cognitive systems have no automatic expectation reset function. For those in technology, this is like "a system without garbage collection."

The Compound Effect of Organizational Debt: Satisfaction Debt Snowballing

Once you give bonuses, unless you give the same amount or more thereafter, it feels wrong that it decreased from before, and bonuses intended to increase motivation end up creating factors that decrease motivation.

To explain this numerically, the compound effect of satisfaction debt occurs:

• Year 1: +100 satisfaction effect from bonus payment
• Year 2: ±0 satisfaction effect from same amount (taken for granted)
• Year 3: -200 satisfaction effect from reduction (double negative effect due to loss aversion)

That is, the cumulative effect becomes +100 + 0 + (-200) = -100, making it more negative than doing nothing. This is the endless cycle. A bonus given by stretching yourself a bit to temporarily make employees happy becomes a cause that torments the company for life.

Problem-Solving Design Philosophy: An Optimization Approach to Conveying Gratitude

Of course, after hearing this story, I don't want managers to stop considering bonuses or preparing employee benefits. The feeling of wanting to reward hardworking employees must not be forgotten.

That's precisely why we should always consider whether there are other methods. This follows the same basic problem-solving process.

Requirements Definition Review: What Problem Do We Really Want to Solve?

Is wanting to give bonuses really about giving bonuses as the purpose?

For example, if the original purpose is to "convey gratitude wholeheartedly" to hardworking employees, then giving bonuses is just one solution method. In that case, it would be better to consider alternative methods that achieve the same purpose without creating organizational debt.

In an era where bonuses aren't even handed out in cash but automatically deposited into bank accounts along with salaries, most people probably don't feel the gratitude managers expect, nor do they feel grateful. Have any of you reading this actually felt grateful to managers for receiving bonuses, sensing the depth of discussion involved?

This is poor employee experience design. There's a gap between the effect managers expect (conveying gratitude) and the actual employee experience (part of salary transfer).

Practice at Kikagaku: Letters to Parents as an Alternative

When I founded Kikagaku and served as president, I prepared alternative methods to convey such gratitude to employees. Moreover, parents must be worried about their children taking risks to join a venture company at a young age. Children are very happy when their parents are pleased.

Therefore, I sent letters expressing gratitude to parents and photos of internal events and work scenes.

Now that I have a son, I understand this even better—seeing children grow is joyful. According to my mother, it's joyful no matter how old they get. In the early startup days, growth investments overlap, leaving us constantly short of money. Therefore, I couldn't pay bonuses, but preparing about 20 photos and letters costs less than 1,000 yen per family.

I've rarely seen people grateful for high bonuses from acquaintances, but these letters pleased every parent, and I received many thank-you letters. Employees happily told me about their parents' joy. This was a solution that achieved the same purpose while being overwhelmingly superior in constraint conditions (cost, sustainability, side effects).

Of course, even hearing this story, some people would prefer money over such letters. This varies by person. That's why I'm not denying giving bonuses itself. I just want to ask managers who make giving bonuses their purpose: Is that really your purpose?

Optimizing Human Relationships from a Technical Perspective

What I learned from this experience is that human relationships also require appropriate design philosophy.

Traditional Bonus Systems

• Input: High monetary amount → Output: Temporary satisfaction
• Side effects: Expectation inflation, sustainability crisis

Alternative: Letters to Parents

• Input: Low cost and creativity → Output: Sustainable satisfaction
• Side effects: Strengthened family relationships, improved employee loyalty

Better methods require fewer resources to achieve the same results and have fewer side effects.

For those in technology, this is the same as "better algorithms achieve the same results with less computational complexity and memory usage."

When Constraints Exist, Management Essence is Truly Tested

I want to say the same thing as my friend once did: It's nice when things are going well.

Over these past few years, I've experienced rebuilding my own company that was doing extremely well during COVID, and turning around a listed company from deficit to profit as a manager. During such times, the consequences of previously acting without purpose-means clarity come back to haunt you.

When there are no constraints, anything works temporarily. That's precisely why whether genuine value creation is happening cannot be understood "at that point." However, when constraints exist, what's truly valuable and what's not becomes clearly separated.

What I learned from experience is that most cost-intensive measures actually didn't contribute to the organization's essential value creation. Conversely, measures conceived under strict constraints generated efficient and sustainable value. This is because constraints stimulate creativity and promote essential problem-solving.

Paying high bonuses, holding events at expensive venues—do these really serve their original purposes?

Always ask what the purpose is. What is sustainable and highly effective for that purpose in the long term? Please continue asking this seriously.

While the opportunity to think about this was the discussion of "should bonuses be given," this is naturally just one example. But the essence has surely been conveyed to you all.