Dan Ariely: Bonuses boost activity, not quality

Bankers, like most people in finance, get paid for action, not creating value.

More than anything, argue the bankers, pay should motivate: huge bonus cheques are to ensure superior performance from superior talent.

On this point, the bankers are wrong. We've recently gathered evidence suggesting that dangling exorbitant sums of money in front of workers doesn't improve performance. If anything, it negatively affects it.

It could be true that the spectre of windfalls will increase activity. If I offered you a £1 million bonus for exceptional performance, you might work more hours and check Facebook less. But would your input be more thoughtful? More creative? Would you be more likely to tap your full-brain potential? Doing more doesn't equal doing better.

To see the effect of bonuses on performance, Nina Mazar (assistant professor of marketing, Toronto University), Uri Gneezy (professor of economics and strategy, University of California, San Diego), George Loewenstein (professor of economics, Carnegie Mellon, Pennsylvania) and I conducted three experiments. In one we gave subjects tasks that demanded attention, memory, concentration and creativity. We asked them, for example, to assemble puzzles and to play memory games while throwing tennis balls at a target. We promised about a third of them one day's pay if they performed well. Another third were promised two weeks' pay. The last third could earn a full five months' pay. (Before you ask where you can participate in our experiments, I should tell you that we ran this study in India, where the cost of living is relatively low.)

What happened? The low-and medium-bonus groups performed the same. The big-bonus group performed worst of all.

We replicated these results at Massachusetts Institute of Technology, where under graduate students were offered the chance to earn either $600 or $60 by performing one four-minute task. Some participants were asked to use cognitive skills (adding numbers); others performed only a mechanical task (tapping a key as fast as possible). On the latter, higher bonuses worked. But when tasks included rudimentary cognitive skills, results mirrored the Indian study. Dangling a very big carrot led to poorer performance.

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Dan Ariely is the author of The Upside of Irrationality and Predictably Irrational.