Do Big Money Bonuses Really Increase Job Performance?
Some top executives are now paid very large one-off bonuses for meeting their performance targets. The theory is that setting and rewarding the attainment of targets increases performance. It's like tempting the mouse with a piece of cheese. But, do humans really behave like mice?
For one thing we have an impressive capacity for fouling ourselves up. An incentive can be both a blessing and a curse because while it should motivate us, it can just as easily psych us out. Actual task performance may suffer because we're obsessing about the money. Also, a bigger prize can make us more tightly focussed, but a tight focus is not useful for some tasks - for example those that involve creativity.
Consequently behavioural economist Professor Dan Ariely and colleagues hypothesised that big bonuses might actually decrease people's performance, and they set out to prove it (Ariely et al., 2004). To make the big bonuses sufficiently 'big' they started out with an experiment in a place where even a psychologist's grant money is a King's ransom: rural India.
There, they recruited local people whose standard of living was low: 26% had no formal education, only half owned TVs, none had a car and only a tiny minority had a telephone in the house. There were three payments levels: 4, 40 or 400 rupees, where 400 rupees was roughly equivalent to a month's salary.
Participants were given eight different tasks testing how the payment levels affected performance. Some tasks involved problem-solving skills, others concentration, and others required creativity:
- Packing quarters: participants had to pack metal pieces into a wooden crate. This required creativity to fit all the pieces inside.
- Simon: an electronic memory game that involves copying the sequence of flashing lights. You can play it here.
- Labyrinth: a game involving tilting a maze to negotiate a ball bearing to the 'finish' position while avoiding traps (holes in the board). This tested motor performance.
In 8 of the 9 tasks, the promise of a bigger bonus actually significantly decreased people's performance.The results surprised even the researchers. In 8 of the 9 tasks, the promise of a bigger bonus actually significantly decreased people's performance. It seemed that rather than motivating participants, the lure of a month's salary was actually putting people off.
While these results were impressive, the researchers wanted to replicate them in the US. So they carried out a similar set of experiments with students at MIT using payment levels of $0, $150 and $300. Even at the top level this was not equivalent to a month's income, but it was still a fair amount of money for students.
Despite a completely different cultural setting, the results were much the same as in India: pay did not increase performance, in fact it lead to worse performance.
This study raises a number of questions about the way monetary incentives are often used to reward performance:
- Should organisations pay big bonuses to improve executives' performance?
- Could the quality of professional sport be significantly improved if huge amounts of money were not riding on the performance of individual players?
- Might some well-paid actors' performances be drastically improved if they didn't receive such disproportionately large compensation?
Set against the minority who receive these types of large performance bonuses, the majority of people get a fixed salary. Perhaps we really shouldn't fiddle about with a system once it works: not just because equality is important but because performances might well be suffering.
» Read more on the psychology of money.
[Image credit: Refracted Moments]
Reference
Ariely, D., Gneezy, U., Loewenstein, G., & Mazar, N. (2004) Large Stakes and Big Mistakes. CMU Working Paper.
Join 21938 readers
Sure. One single tasks. When so much (a month salary) is risked on how you perform you are going to be stressed and badly perform. Similarly - a job interview always creates stress.
The motivating factor is over the longer term. Big lolly might be what keeps those exec's at work till 9pm when they would rather be with their kids?
I agree with Michael. Don't those experiments primarily measure the effect of pressure on performance?
For job performance I'd think the primary performance determining factor is motivation, and the goal of a bonus is to provide that motivation.
I'd be curious to see if the promise of a potential big bonus is sufficient to motivate someone over an extended period such as a month or more. Maybe give them a computer and some set of intellectual problems (heck, give them a pile of assignments from math courses). Up the payments to 400 and 800, and see how well they do.
Michael and Aluchko, pressure is one possible mechanism that might connect bonuses to poor performance. This study, though, doesn't test the mechanism so we can't come to any conclusions about that.
Since bonuses reduce performance in the short-term, doesn't it also make sense to speculate that they'll do so in the long-term?
Jeremy, I suppose other mechanisms could be at work but performance seems to be the most obvious (I can't see motivation being an adverse factor, except to the extent it contributes to pressure).
As to the short vs long term I don't like to extrapolate when the most likely mechanism is primarily a short term effect.
I find the effects of pressure tends to decrease as we go along, and after experiencing a scenario a couple time the pressure is definitely lesser. I don't know if we're better adapting to pressure or if we're just putting the consequences in perspective, but I with most jobs I don't think they'd really hold a constant state of high pressure (maybe something like healthcare, with definite performance consequences would be different).
Over something long term like a job bonus I don't really see the pressure being significant by the end.
Being a bit of a sports fanatic, I have a feeling this doesn't apply to athletes. I'm not sure of any definitive statistics about it, but you always hear about athletes in their "contract year" and these are usually the guys who perform the best that season. Not sure about individual "big game" moments for these players though and whether they do better or worse.
Michael and Aluchko are correct. This is a very apples and oranges comparison.
The only question this study sheds light on is: "Does a financial reward affect a person's willingness to take chances and experiment when performing an UNFAMILIAR task?" It has no relevance to executives, pro athletes or actors, who are highly trained and experienced in their fields, nor is it relevant to people who are trained in performance-enhancing states of consciousness (the 'flow' that you mentioned in another post).
Jason, you suggest training is an important or perhaps protective component. I'd go along with that to a certain extent but I'd definitely question whether training can ever completely eradicate the effect seen in this study.
Sportsmen choke, professionals make mistakes, actors throw in duff performances. This study suggests money (in the form of bonuses) might contribute to this.
You're right to point out the difference in the tasks being performed, but wrong to completely write off the interpretation on that basis alone.
Sure there's a bit of speculation involved here but it's not as far-fetched as some of you are making it sound :-)
A BIT of speculation?!? C'mon.
I'm assuming the activities in the study are new and novel to the participants. Motivation without skills and experience means nothing. The study as you describe it shows NO CORRELATION at all between the subjects and high-level professionals (in any field).
The job of the novice in any task is to experiment, make mistakes, and learn from them. The learning curve is very steep. By offering them large sums of money their objective shifts from learning to AVOIDING MISTAKES. This is the worst possible strategy for long-term success. Offering extrinsic rewards at that point short-circuits the learning curve.
As Michael and Aluchko mentioned, the time factor is also very important. The bonuses you mention are usually offered months in advance, not minutes like I assume they were in the study. The difference psychologically between these two time frames is so astronomical that any comparison is meanlingless. Thus, the study is flawed from the very outset.
"professionals make mistakes..."
Yes they do, but I challenge you to show any evidence that they make more mistakes than unpaid amateurs in their field. And then I challenge you to show any evidence that those same professionals make fewer mistakes when performing the same tasks with no extrinsic rewards involved. Until then the conclusions given are pure speculation.
High-level professionals almost always spend several years honing their craft with little or no extrinsic rewards before making it to the 'big leagues.' I believe these people derive a great deal of INTRINSIC satisfaction from performing their tasks, and this more than anything else is what pushes them to do well. Whether higher pay helps or hinders them is so highly personalized and depends on such a large number of variables that the question becomes meaningless for any group larger than ONE individual.
So again, the study is flawed from its inception.
This habit of oversimplifying and overgeneralizing in an attempt to break complex human behaviors down into simple robotic yes's and no's often leads to such absurd conclusions. And then psychologists wonder why they lack credibilty with the general public.
Now, if you want a much more meaningful question, try this: Regardless of how well a top performer does his/her job, does the amount of pay and bonuses offered influence WHERE they choose to do it?? I don't think even Ariely et al. could screw that one up.
Jason, I applaud your persistence with this :-) but you're still just speculating as much as I am. Seems you've convinced yourself pretty well though!