Mo' money mo' problems

I remember watching TV sometime in the middle of the 2008-2009 financial crisis. Amidst the fear and frustration, I recall intense outrage at the bankers and their bonuses.

These executives, who had irresponsibly led their companies off of proverbial cliffs, were receiving billions of dollars in compensation for their abysmal performance.

I also remember some of the talking heads defending these excessive bonuses, claiming that these huge incentives were necessary for attracting and retaining top talent… and encouraging performance.

I must admit that I thought it sounded kind of reasonable.

It fits into the standard understanding of motivation: dangle a big carrot in front of someone and they’ll work harder to get there. The bigger the carrot, the harder they’ll work.

But does the research support this?

According to research by one of my mentors, Dan Ariely: No.

The way he discovered this is fascinating. Instead of applying for a $10 billion research grant and running his experiment on Goldman Sachs partners, he decided to go to rural India. There, $50 was equivalent to five-months’ pay. This allowed him to look at the impact of different, even life-changing, bonus amounts with his limited research grant.

As Ariely wrote in the New York Times:

“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 asked them, for instance, to fit pieces of metal puzzle into a plastic frame, to play a memory game that required them to reproduce a string of numbers and to throw tennis balls at a target. 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. The lowest bonus was 50 cents — equivalent to what participants could receive for a day’s work in rural India. The middle-level bonus was $5, or about two weeks’ pay, and the highest bonus was $50, five months’ pay.”

What do you think he 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.”

Interesting.

“But…” you may say. “This may be true of those in rural India, but does the effect hold in America? It’s different here, after all.”

Yes. He replicated the study in Boston and found the exact same thing.

The higher the bonus, the worse the performance.

Here’s how he sums up the research: “We found that as long as the task involved only mechanical skill, bonuses worked as would be expected: the higher the pay, the better the performance. 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.”

What was the mechanical task? Tapping the “v” key and then the “n” key on the keyboard. Those in the experiment who were able to do fewer than 600 “v, n” key presses got nothing. Those who reached 600 received $15, and then received ten cents for each additional “v, n”.

This requires, more or less, zero thought.

So, if the task you’re asking your employees to do requires more thought than alternating between typing “v” and then “n”… you probably don’t want to use large monetary bonuses as your incentive. The performance benefit of money seems like it probably maxes out at a low level.

If your task requires even a modicum of thought, the bigger the monetary bonus the lower the performance.

So, what should your incentive be? That’s a longer conversation for another time… but I would encourage you to think about things other than money. Think about social rewards, such as praise and compliments. Think of tangible things, such as food and gadgets. Research has shown that these types of incentives can be even more effective than $$$ in encouraging performance.

Dan and I talk about the three types of non-monetary rewards in our book, “Hacking Human Nature for Good”. I’ll write more about them soon.

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A clarification:

I made an error yesterday.

While reading last night's email this morning, I realized I left out a key sentence that might have made the article confusing. In my quest to make the content as simple as possible... I over-simplified. 

The beginning of the article should have read as follows:

"I also remember some of the talking heads defending these excessive bonuses, claiming that these huge incentives were necessary for attracting and retaining top talent… and encouraging performance.

I must admit that I thought it sounded kind of reasonable.

It fits into the standard understanding of motivation and performance: dangle a big carrot in front of someone and they’ll get motivated and work harder to get there. The bigger the carrot, the harder they’ll work. And the harder they'll work the better they'll perform.

But does the research support this?

According to research by one of my mentors, Dan Ariely: No."

Performance, after all, is the variable we're interested in. Not motivation. The people in the high bonus condition may have, indeed, worked harder... but their performance was no better, in fact it was worse, than the low and medium conditions. Why? Due to anxiety and fear of losing out on the reward. They were actually *too* motivated/aroused by the large carrot.

As Dan Ariely writes in the paper this email was based on:

"However, psychological research suggests that excessive rewards can in some cases produce supraoptimal motivation, resulting in a decline in performance...

...Tasks that involve only effort are likely to benefit from increased incentives, while for tasks that include a cognitive component, there seems to be a level of incentive beyond which further increases can have detrimental effects on performance...

...It now appears that beyond some threshold level, raising incentives may increase motivation to supraoptimal levels and result in perverse effects on performance. Given that incentives are generally costly for those providing them, raising contingent incentives beyond a certain point may be a losing proposition. Perhaps there is good reason why so many workers continue to be paid on a straight salary basis."

So my apologies, in my quest to write a slick email for you guys I oversimplified the message.

Hope it makes more sense now.

Jason Hreha