Big Bonuses

| Fri Nov. 21, 2008 3:36 PM EST

BIG BONUSES....Dan Ariely writes in the New York Times today about an experiment he did to find out if paying people big bonuses motivated them to produce better results:

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. 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.

....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.

The gibes pretty well with my understanding of how to get the best performance out of people. Money matters, but not that much. Being happy in your job matters, but not that much. What really matters is (a) having the skill set for the job and (b) having the support infrastructure (tools, budget, executive buy-in, whatever) needed to allow you to do your job.

Now, obviously, money is important to attract people who have the skill set for the job. If CEOs are all being paid 400x the median salary, the best ones aren't going to work for someone who offers them only 100x. Why would they? Still, the huge secular increase in CEO salaries (and Wall Street bonuses) over the past few decades has almost certainly produced absolutely nothing in the way of higher performance. All it's done is suck money away from blue collar workers, who do respond the way you'd expect to monetary incentives, away from support infrastructure, which genuinely improves the performance of high-skill workers, and away from shareholders.

Bottom line: in a variety of ways, our economy would almost certainly operate more efficiently if the super-rich were paid less. At best it does no good, at worst it motivates reckless behavior, and in the end it prevents the money from being put to its most beneficial use. Quite a mess we've gotten ourselves into since 1980.

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