Tuesday, May 05, 2009
From the archive: Pay enough or not at all
Following up on the earlier post on the fact that monetary incentives might lead to worse outcomes, a paper by Uri Gneezy and Aldo Rustichini further confirms that monetary incentives can actually reduce performance. However, they also find that larger monetary incentives do increase performance. The paper can be found here. Here is the abstract:
Economists usually assume that monetary incentives improve performance, and psychologists claim that the opposite may happen. We present and discuss a set of experiments designed to test these contrasting claims.
We found that the effect of monetary compensation on performance was not monotonic. In the treatments in which money was offered, a larger amount yielded a higher performance. However, offering money did not always produce an improvement: subjects who were offered monetary incentives performed more poorly than those who were offered no compensation. Several possible interpretations of the results are discussed.
Their results are based on two experiments. In the first experiment, students answered questions on a test which largely tested effort. All students were promised a fixed payment for participation; however, some students were paid an additional sum based on the number of questions they answered correctly. One group was given 10 cents per correct answer, another $1 per correct answer, and another $3 per correct answer. The group getting 10 cents per correct answer performed significantly worse than the group not getting any additional payment (and this group did worse then the $1 and $3 groups).
In the second experiment, the researchers introduced incentives to a public service day which occurs regularly in Israel. Apparently, certain days during the year students take to the streets to collect donations for various causes. Three groups of students were studies. In one group, no additional incentives were introduced. In another group students received 1 percent of what they raised. And in the other group they received 10 percent of what they raised. In both of the treatment groups it was made clear that the money was being paid by the researchers and was not coming out of the money that was being raised. Again, the no treatment group out performed the small incentive group, and in this experiment they equaled the high treatment group.
If firms pay workers bonuses for effort in addition to their base wage in an attempt to give them an incentive to try harder, it may backfire because the worker may think (or realize) that his base wage is compensation simply for showing up on time every day and making minimal effort. This is probably especially true if the firm introduces the effort incentive after the worker has been working at the firm for a period of time. He's basically getting his base wage with no cost to him, and he has another "effort job" on top of that where the compensation is 100% commission based.
Looking at it from the other side, we can explain it in a similar way. The act of working is usually negative; it is something that we would rather not do. But if we were sacrificing a bonus, then suddenly we would be justified in slacking off because we would be giving up this bonus as compensation. While I'm sure that this is the exact opposite of employer intentions, it is in each workers mind in which this transaction is justified. If, however, the bonus is large, the benefits from earning that bonus would outweigh the benefit of being allowed to slack off, and output would most likely go up.
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