With Friends Like These….

Being friends with your direct reports has its perks. You can often give—and get—honest feedback. Friends can be easier to motivate. Plus, it’s tough to make other friends when all of your time is spent at a demanding job.

But bosses may be short-shifting their friends financially, to avoid the appearance of playing favorites. Indeed, when managers are handing out discretionary bonuses—and when employees will know who gets the rewards—bosses often pass over their pals in favor of other workers, according to a recent study in the Journal of Experimental Social Psychology. The study is more evidence that bonus and rewards programs can be considerably more effective if there’s a transparent set of rules around them.

Tom McMullen, senior client partner at Korn Ferry and leader of the firm’s North America Total Rewards practice, says the findings didn’t entirely surprise him. “People are nervous about being seen as rigging the system,” he says. It’s a similar situation found in little-league sports, where one of the kid’s parents coaches the team. “The dad can be harsher on their own kid versus others. They want to make a perception that they aren’t biased,” McMullen says.

The researchers asked nearly 1,200 people to make a simple decision, whether to give a larger bonus to one worker who did a slightly better job or to treat the two workers equally. But the answers varied depending on the other information researchers divulged. If the people knew that their bonus decision was going to be made public, then they were far less likely to give a bonus to a worker who also was a friend, even if the friend was the better performer.

In private, however, participants were far more likely to give more to their slightly more deserving friend. That behavior indicates that not only are people more likely to be fair in public than in private, but that they are even willing to go against what they might privately think is fair in order to avoid the public appearance of bias. “They forsake being impartial to appear impartial,” says Alex Shaw, an assistant professor of psychology at the University of Chicago and one of the authors of the study.

Workers often are more concerned with feeling that a rewards system is fair than they are with how high the reward is, McMullen says. Indeed, a lack of perceived fairness in rewards systems can seriously erode trust in management and drive people out of organizations.

These days, these type of discretionary bonus systems are found in smaller firms and ones led by founders. In those firms, experts say, there’s often a higher degree of trust among teammates. Those firms often have two types of bonuses that everyone knows about: a “holiday” bonus where everyone gets the same thing near year’s end, or a “great year” bonus, where non-managers get one amount and managers get another amount.

But problems can arise when bosses have big pots of bonus money to distribute. One manager may use a different set of criteria to determine the bonus than another. These decisions, even when they’re supposed to be private, have a way of being found out, McMullen says.

It’s one reason why many larger companies have been moving toward incentives rather than discretionary bonuses. Incentives are a transparent agreement between employee and employer. If an employee achieves a particular level of sales or other objectives, he or she gets rewarded in a certain way. The metrics and rules are known in advance.

It’s also why, over the last several years, some firms have adopted employee recognition programs, essentially taking some of the reward decision-making out of the boss’s hands. It gives workers a chance to acknowledge peers who’ve been particularly innovative, impactful, and successful. “Peer-to-peer recognition—and not just boss-subordinate recognition—is seen as most powerful. So, this can take the heat off the boss,” McMullen says.