Dan Ariely recently published a follow-up to his great book Predictably Irrational (our review of that book here.) His new book is called: The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home and it is again – well written, well documented and extremely valuable to those of us who try to find ways to align and guide behavior in the business world.
For us here at I2I – we think it is more ammunition for our point of view – balance and alignment. (Also see this recent post by @AnnBares at Compensation Café on balance.)
Need to Include Non-Cash
One thing I’ve yet to see – and it is an important thing – none of the research I can find other than that provided by the incentive industry – makes allowances for non-cash awards and bonuses. Intellectually, I believe that disconnecting the monetary value from the awards and making them more of an experience (whether that be merchandise or travel) would reduce the negative effects these studies show. (Hint, hint, nudge, nudge to the Incentive Research Foundation – here’s a place you could really make some hay – duplicate the experiments in this book but use merchandise and travel as the rewards and see what the results are…)
But until that time we’ll have to extrapolate from research such as this.
Netting it Out…
The whole book is fascinating but the first chapter has the most applicability to the discussions usually found on this site. It is entitled: Paying More for Less: Why Big Bonuses Don’t Always Work.
It’s a familiar theme nowadays, from Dan Pink to Alfie Kohn, the assault on incentive bonuses is all the rage. And in many cases I would agree. But keep in mind – the operative issue here isn’t the “incentive” itself – it’s the size and value of the reward. We don’t want to throw the baby out with the bathwater. While “Drive” was more adamant about removing ALL incentives (or darn near it) Dr. Ariely is a bit more realistic. From the book:
“For tasks that require cognitive ability, low to moderate performance-based incentives can help. But when the incentive level is very high, it can command too much attention and thereby distract the person’s mind with thoughts about the reward.”
The Research
The research conducted by Dr. Ariely took place in India – offering 1-day's pay, 2-weeks' pay and 5-months' pay as incentives for completing 6 tasks – some cognitive, some more mechanical. The results showed little difference in the 1 day and 2-weeks' pay scenario – but a much lower performance score for those in the 5-months' pay scenario.
Loss Aversion
One element added to the mix that I found enlightening since we’ve talked about it here before – is they added “loss aversion” to the mix. The rational for including this (from the book):
"We thought that paying up front was analogous to the way many professionals think about their expected bonuses every year. They come to think of the bonuses as largely given and as a standard part of their compensation. They often even make plans for spending it. Perhaps they eye a new house with a mortgage that would otherwise be out of reach or plan a trip around the world. Once they start making such plans, I suspect that they might be in the same loss aversion mind-set as the prepaid participants.”
In the experiment they told the participants that they already earned the 5 month bonus – and gave them the money, but told them they would have to return a portion based on their performance. If they maintained a certain level of performance they could keep the 5 months pay – but if they fell below they would start to “lose” their money.
In this instance the negative effect on performance were even more pronounced – the first participant was so nervous he couldn’t complete the tasks and the second, when he started to fail immediately – ran out of the experiment with the money. In other words (my opinion) his loss aversion to such a high reward caused him to act in irrationally – to the point of stealing. Sound familiar?
When awards are too big – and too expected – rational thinking is short-circuited.
I Couldn’t Have Said it Better (but I’ve said it before here many times)
To end this post – here’s Dr. Ariely again on bonuses and incentives:
“Could all this mean that sometimes we might actually behave less rationally when we try harder? If that’s so, what is the correct way to pay people without overstressing them? One simple solution is to keep bonuses low—something those bankers I met with might not appreciate. Another approach might be to pay employees on a straight salary basis. Though it would eliminate the consequences of over motivation, it would also eradicate some of the benefits of performance-based payment. A better approach might be to keep the motivating element of performance-based payment but eliminate some of the nonproductive stress it creates. To achieve this, we could, for example, offer employees smaller and more frequent bonuses. Another approach might be to offer employees a performance-based payment that is averaged over time—say, the previous five years, rather than only the last year. This way, employees in their fifth year would know 80 percent of their bonus in advance (based on the previous four years), and the immediate effect of the present year’s performance would matter less.”
Sometimes more is just... more - it isn't better.
There is no substitute for taking some time, analyzing exactly what you want to accomplish, identifying behaviors and linking those behaviors to awards that are desirable but not detrimental. If you aren't sure - ask for help (that'd be a hint to call us.)
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