Bonus Botching

Image via Wikipedia

Dan Ariely (of Predictably Irrational fame) is writing a new column in Wired UK. His first looks at the truth behind bonuses:

More than anything, argue the bankers, pay should motivate: huge bonus cheques are to ensure superior performance from superior talent.

On this point, the bankers are wrong. We’ve recently gathered evidence suggesting that dangling exorbitant sums of money in front of workers doesn’t improve performance. If anything, it negatively affects it.

…

To see the effect of bonuses on performance, Nina Mazar (assistant professor of marketing, Toronto University), Uri Gneezy (professor of economics and strategy, University of California, San Diego), George Loewenstein (professor of economics, Carnegie Mellon, Pennsylvania) and I conducted three experiments. In one we gave subjects tasks that demanded attention, memory, concentration and creativity. We asked them, for example, to assemble puzzles and to play memory games while throwing tennis balls at a target. We promised about a third of them one day’s pay if they performed well. Another third were promised two weeks’ pay. The last third could earn a full five months’ pay. (Before you ask where you can participate in our experiments, I should tell you that we ran this study in India, where the cost of living is relatively low.)

What happened? The low-and medium-bonus groups performed the same. The big-bonus group performed worst of all.

Why this happens isn’t entirely clear — though, nervousness brought on by high stakes could be involved. An experiment on public scrutiny showed similar results: a little improved performance, a lot hurt performance.