Homepage image courtesy A Magill
This article was taken from the March issue of Wired UK magazine. Be the first to read Wired's articles in print before they're posted online, and get your hands on loads of additional content bysubscribing online
When Kenneth Feinberg, the White House's man watching over the US Troubled Asset Relief Program, ordered bailed-out firms to cut exec pay and restructure (that is, downgrade) bonuses, many Americans greeted the news with unqualified approval. Joy, even. This new policy fits well with our human instincts for justice and revenge. Given how they've performed, bankers' pay just seems so patently unfair.
Bankers, of course, argue that fairness has nothing to do with it. And they're right. Fair pay based on contributions is not the point, and it's practically socialistic. Pay should be structured to recruit certain kinds of talent -- yes, how you pay affects who applies -- and it should help align individual goals with company goals.
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.
We later looked at another motivator: public scrutiny. We asked participants in a University of Chicago study to solve anagrams, sometimes privately in a cubicle and sometimes in front of the others. We found that the subjects wantedto perform better when they worked in front of others and performed much worse alone. Like money, social pressure motivates people, especially when the tasks require only effort and not skill or thinking. But at some point, too much of it overwhelms the motivating influence.
If our tests mimic the real world, then massive bonuses clearly don't work. They may not only cost employers more but also discourage executives from working to the best of their abilities. The financial crisis, perhaps, didn't happen in spite of the bonuses, but because of them.
I presented our results to a group of banking executives. They listened politely, and then they assured me that their employees' work would not follow this pattern. I said to them that with the right research budget and their participation, we could examine this assertion. They weren't interested.
These experiments were carried out in India and in the US, so obviously there is no question that the British people - and British bankers - would act much more rationally...
MicrobiographyDan Ariely is the James B Duke professor of behavioural economics at Duke University, North Carolina, and author of Predictably Irrational(HarperCollins)
This article was originally published by WIRED UK
