Dan Ariely in the New York Times:
What do we really know about the relationships between very large bonuses and job-performance? To look at this question, my colleagues Uri Gneezy of the University of California at San Diego, George Lowenstein of Carnegie Mellon, Nina Mazar of the University of Toronto and I conducted a few experiments.In one experiment, we presented 87 participants with an array of tasks that demanded attention, memory, concentration and creativity. We asked them to fit pieces of a metal puzzle into a plastic frame, to play a memory game and to throw tennis balls at targets, among other tasks. We promised them various payments if they performed any of these tasks exceptionally well. About a third of the subjects were told they'd be given a small bonus, another third were promised a medium bonus and the last third could earn a very 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. The low bonus was 50 cents – equivalent to one day's work in rural India. The medium bonus was $5, or about two weeks' pay, and the very high bonus was $50, roughly five months' pay. The results defied conventional wisdom. The group offered the highest bonus did worse than the other two groups – in every single task. On top of that, the people offered medium bonuses performed no better or worse than those offered low bonuses. … Financial rewards are a double-edged sword. They provide motivation to work well, but they also cause stress and preoccupation with the reward that can actually hurt performance. If our tests mimic the real world, then higher bonuses may hinder executives from working to the best of their ability. … So it turns out that social pressure has a similar effect to money – it too is a double-edged sword. It motivates people, especially in tasks that demand effort and no skill. But it can provide stress, too, and at some point that stress overwhelms the skill.