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.