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.