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.
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.
[Image credit: Refracted Moments]
Ariely, D., Gneezy, U., Loewenstein, G., & Mazar, N. (2004) Large Stakes and Big Mistakes. CMU Working Paper.
The Psychology of Money
→ This post is part of a series on the the psychology of money:
- Avoid The Relativity Trap – How Thinking Globally Can Save You Money
- Social Versus Financial Thinking – When Money Makes People Lazy and Selfish
- FREE! But at What Price?
- 6 Quirks of Ownership: How Possessions Bend Our Perceptions
- The 3 Reasons Money Brings Satisfaction But Not Happiness
- Do Big Money Bonuses Really Increase Job Performance?
- Money and Self-Control: The Battle Between Thoughts and Emotions
- Why Money is Part of Human Nature: Money as Both Tool and Drug
- Why We Buy: How to Avoid 10 Costly Cognitive Biases
- 8 Psychological Keys to Spending Wisely
- How Does The Cleanliness of Money Affect Our Spending?
Published: 14 April 2008