Financial and Public Incentives to Perform: What Works

Large bonuses and salar­ies are in place to attract prime tal­ent and as an incent­ive to improve per­form­ance, goes con­ven­tion­al wis­dom and the bankers’ rhetoric. How­ever recent research by Dan Ari­ely (author of Pre­dict­ably Irra­tion­al) and col­leagues sug­gests that while large pay will attract the best tal­ent, large per­form­ance-based bonuses may hinder super­i­or per­form­ance.

Inter­est­ingly big bonuses suc­ceeded in increas­ing per­form­ance only when the tasks under­taken were mech­an­ic­al in nature (e.g. tap­ping a key as fast as pos­sible) but not when they were cog­nit­ive. When tasks were con­duc­ted in pub­lic (pub­lic scru­tiny as a task motiv­at­or), per­form­ance did increase.

Like money, social pres­sure motiv­ates people, espe­cially when the tasks require only effort and not skill or think­ing. But at some point, too much of it over­whelms the motiv­at­ing influ­ence.

If our tests mim­ic the real world, then massive bonuses clearly don’t work. They may not only cost employ­ers more but also dis­cour­age exec­ut­ives from work­ing to the best of their abil­it­ies. The fin­an­cial crisis, per­haps, didn’t hap­pen in spite of the bonuses, but because of them.