Wednesday, 15 September, 2021
Stephen Mihm
The signing bonus, once the province of elite athletes and corporate executives, has gone mainstream. In the tightest labor market in years, employers like Amazon are shelling out thousands of dollars up front to truck drivers, trash collectors, warehouse workers and other in-demand workers.
It’s a recruiting tool with a long history. But signing bonuses have evolved significantly over the years, scrambling the incentives that once defined the relationship between employers and workers. That history helps explain how this tactic can work – and why it could fail desperate employers this time around.
The first “employer” to offer signing bonuses was the military. The Roman Empire, for example, gave new soldiers an enlistment bonus known as a viaticum – typically, a few gold coins. This strategy enabled the Romans to staff their armies with volunteers who willingly went off to fight the barbarian hordes for a set period of time.Conor Sen: Amazon and Walmart are Winning the Labor Market Wars
In the American Revolution, the Continental Congress passed a resolution that offered a cash “bounty” in order to entice young men to sign up for what proved to be a long, protracted war. These bonuses were relatively modest at first: a mere three dollars, or about $100 in today’s money. In the Civil War, the Union handed out increasingly generous cash bounties to secure soldiers. Unfortunately, this practice fostered a practice known as “bounty jumping,” in which recruits would collect the bonus and then disappear – and repeat the trick elsewhere.
The enlistment bonus fell out of favor for the military, but it soon found a new home: professional baseball. By the late 1880s, several of the more successful leagues began competing against one another for the best players.
One of the first stars to earn a sizable bonus was Charlie Bennett, a catcher famous for refusing to wear protective equipment. He once continued to play through a game – and all the succeeding games – after a ball ripped his thumb to the bone. Such insane dedication prompted his team, the Boston Beaneaters, to give him a $6,000 signing bonus – a small fortune at the time. By 1914, the Boston Nationals, desperate to recruit second-baseman Johnny Evers, paid out a whopping $20,000 bonus – over $500,000 in today’s money.
Signing bonuses proliferated in a number of professional sports in the 20th century. The practice became so widespread – and expensive – that by 1960, professional baseball alone was handing out $7.5 million in bonuses to untested players. But this practice, much like the older military enlistment bonus system, obliged players to remain with a particular team for a set amount of time.
It wasn’t until the 1980s and 1990s that the obligation-free bonus came into being. The first to receive them were CEOs who received bonuses upon jumping ship from one company to another. These “golden hellos,” as the financial press dubbed them, consisted of cash, equity or a mix of both. Unlike earlier bonuses, recipients of such largesse didn’t have a contractual obligation to the company which hired them.
In the 1990s, the signing bonus was extended down the food chain, mostly as a way to lure employees without increasing actual salaries. In 1997, for example, a survey of recent graduates of the top 11 business schools found that 80% received signing bonuses, up from 62% only three years earlier. These averaged around $10,000, though some grads received even more.
As workers became increasingly scarce, a wide range of employers began offering bonuses to entice workers. Burger King lured managers away from competitors with $5,000 checks and promised $150 for burger flippers. By 1997, a survey found that 39% of all companies had turned to the bonus as a recruitment tool, with everyone from software engineers to butchers benefitting. Cementing the trend in history was none other than the Department of Labor, the ultimate authority on employment in America. The agency used it to reel in economists.
These organizations quickly found that no-strings-attached bonuses worked best under very specific conditions. Companies that offered them first – before any competitors in a given area – tended to reap the greatest rewards, snaring the best workers and keeping them, too. The imitators, by contrast, discovered that it was hard to buy loyalty when others had beaten you to the punch.
These anecdotal findings anticipated the research on signing bonuses that has accumulated since that time. Researchers have found, for example, that signing bonuses can work when they successfully communicate to a prospective employee that a firm believes the individual is a good fit with the firm. When signing bonuses are relatively rare – because there’s a surfeit of workers, for example – these enticements mean so much more. But when everyone is offering them in a mad rush to fill vacancies, the bonus loses its power.
These finding suggests that our current mania for bonuses may be inevitable, but it’s unlikely to improve performance or increase loyalty. Once bonuses become ubiquitous, they become a transactional benefit that means nothing more than a few extra dollars.
If history teaches us anything, it’s that the obligation-free signing bonus won’t remain a fixture of ordinary employment for too much longer. Eventually, the labor market will tank, much as it did after the dot-com boom. When it does, the only people receiving signing bonuses will be the usual suspects: top executives, professional athletes and the genuinely rare individual whose skills remain in demand no matter what happens to the economy.
Bloomberg
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