Monday, 7 June 2010

Big Bonus = Better Performance?

What's the relationship between pay and performance? Is it wise to pay executives with incredible bonuses? Higher pay equals more motivation? Dan Ariely, professor at Duke University and author of "Predictably Irrational" and most recently of the new book "The Upside of Irrationality" tried to answer these questions (and many others) with one of his nice experiments.

Imagine the following experiment: you are given six tasks to perform. All the tasks require a mix "creativity, concentration, memory and problem-solving skills". Each task lasts for some minutes; all together they last for about an hour. In the first condition you are told that if you do very well in the six task you will get the equivalent of one day of compensation. In the second condition you are given two weeks of compensation. In a third condition you are given, instead, five months of compensation!

Professor Ariely and his collaborators run this experiments in rural India (where the average person monthly spending is about $11). In this way they could perfom the experiment without "raising the eyebrows and ire of the university's accounting system", but still offer very meaningful rewards to the people involved.

The results showed that money can be a "double-edged sword". In fact more money are motivating you to perform better. But, this holds true up to a certain point. After a certain amount, big bonuses have a stressing effect: you feel like you have to give more but enter into a stressed state of mind and are not able to perform well anymore. As mentioned by Ariely in a recent interview on his book: "when it comes to creativity and problem solving and thinking and memory and concentration, it turns out you can't will yourself to higher level of performance. And instead, the high bonus actually got people to be very stressed."

Therefore, according to Ariely's experiments, the incredible bonuses executives are taking would not lead them to perform better. If you want to find out more about the relationship discussed here and learn much more about the way in which irrationality governs our life give a look to Dan Ariely last book: The Upside of Irrationality: the Unexpected Benefits of Defying Logic at Work and at Home.