I was reminded of this a few months ago when I was sent a link to this presentation http://www.ted.com/talks/view/id/618. Here Dan Pink makes the case for rethinking how we motivate people. In his presentation (go watch it now!) Dan quotes from ‘Large Stakes and Big Mistakes’, a report based on research by DAN ARIELY, Duke University; URI GNEEZY, Rady School of Management; GEORGE LOEWENSTEIN, Carnegie Mellon University and NINA MAZAR. Rotman School of Management. They state that the idea that “increasing performance-contingent incentives will improve performance rests on two subsidiary assumptions: (1) that increasing performance-contingent incentives will lead to greater motivation and effort and (2) that this increase in motivation and effort will result in improved performance”. The first of these assumptions seems generally accepted and proven but the second, the subject of their tests in the USA and India, shows up as seriously flawed. Their conclusion states “Many institutions provide very large incentives for tasks that require creativity, problem solving, and memory. Our results challenge the assumption that increases in motivation would necessarily lead to improvements in performance. Across multiple tasks … higher monetary incentives led to worse performance”. They do not dispute that “For many tasks, introducing incentives where there previously were none or raising small incentives on the margin is likely to have a positive impact on performance” but firmly conclude “high payments cannot be relied upon to produce optimal behaviour” – bankers please note!
Incentives do increase effort, so are particularly appropriate for physical work and as an inducement for people to do physical things – start earlier, increase their pace of work etc. High incentives also increase focus, they narrow our field of vision and close our mind to exploring options, alternative solutions and, maybe, consequences. So this could explain why the most highly incentivised people on the planet, bankers, got it so fundamentally wrong. The salary-bonus balance is too heavily skewed to the incentivising bonus.
Salaries (the fixed remuneration package) have to be pitched at a level that will offer what are perceived to be appropriate and competitive inducements to take a job and keep turning up each day to do it. Salary pays you to do the job required. Bonuses should be related to above target performance and incremental profit achievement. Bonuses should never, regularly, be more than 30% of gross pay and ideally should be under 10%. Many years ago I worked with a manufacturing company who paid a generous bonus to its workforce based on profit distribution. For many, many years the bonus was always good – so good and consistent in fact that the workers had taken out mortgages based on their earnings inclusive of the bonus. When a combination of price competition from abroad and a slowing economy impacted on profits, the workforce suddenly found that its basic pay was actually insufficient for their needs and they were in serious trouble. In this instance the enlightened owner/managers, on seeing the problem, quickly raised salaries and reduced the bonus content to restore a realistic balance.
Cash bonuses are a poor and potentially performance damaging incentive that can create problems for the payer’s business and the recipient, if above a modest level.