Are Big Bonuses Counterproductive?

Does exceptional pay encourage exceptional effort?:

What’s the Value of a Big Bonus?, by Dan Ariely, Commentary, NY Times: By withholding bonuses from their top executives, Goldman Sachs and UBS may soften negative reaction from Congress and the public... But will they also suffer because their executives, lacking the motivation that big bonuses are thought to provide, will not do their jobs well? ...[D]oesn’t the promise of a big bonus push people to work to the best of their ability?

To look at this question, three colleagues and I conducted an experiment. We presented 87 participants with an array of tasks that demanded attention, memory, concentration and creativity. ... We promised them payment if they performed the tasks exceptionally well. About a third of the subjects were told they’d be given a small bonus, another third were promised a medium-level bonus, and the last third could earn a high bonus.

We did this study in India, where the cost of living is relatively low so that we could pay people amounts that were substantial to them but still within our research budget. ...

What would you expect the results to be? When we posed this question to a group of business students, they said they expected performance to improve with the amount of the reward. But this was not what we found. The people offered medium bonuses performed no better, or worse, than those offered low bonuses. But what was most interesting was that the group offered the biggest bonus did worse than the other two groups across all the tasks.

We replicated these results in a study at the Massachusetts Institute of Technology... We found that as long as the task involved only mechanical skill, bonuses worked as would be expected... But when we included a task that required even rudimentary cognitive skill, the outcome was the same as in the India study: the offer of a higher bonus led to poorer performance.

If our tests mimic the real world, then higher bonuses may not only cost employers more but also discourage executives from working to the best of their ability. ... For most bankers, a multimillion-dollar compensation package could easily be counterproductive. ...