As I read Dan Ariely's new book, I was particularly intrigued by his research findings regarding the effects of bonus compensation on human performance. Ariely conducted an interesting experiment in India along with several colleagues. They created a a variety of games and tasks for subjects to complete, and they created three conditions (low, medium, high bonus). They chose India so that the bonuses would be small in absolute dollar terms, but very high in terms of their worth to an average Indian citizen. The highest bonus level actually constituted approximately five months’ pay for the subjects in the experiment.
What were the results? You might expect performance to rise with bonus level. After all, that fundamental belief underlies compensation schemes in most companies. However, Ariely and his co-authors found that performance was lowest in the highest bonus condition. The same results held in the United States. What happened? Some combination of stress, fear of losing the money, and other psychological pressures, such as over-attention to the bonus as opposed to the task itself, seemed to cause participants in the highest bonus condition to actually perform poorly on the games and other tasks in the experiment. One can certainly relate to this finding. Consider how many business executives may find themselves obsessing over their compensation toward the end of the year, and perhaps becoming distracted from the actual work that they must accomplish.
By the way, these results hold when the tasks involve some level of cognitive skill. If the tasks are purely mechanical in nature, then higher bonuses yield higher performance. That finding indeed suggests that stress may play a factor in diminishing performance on tasks that require thinking and reasoning (such as many business tasks).