How Much Should We Pay Banking Executives? Less

An excerpt from Dan Ariely’s new book (The Upside of Irrationality) in which he talks about some experiments he conducted on the performance effects of bonuses:

We replicated these results in a study at MIT, where undergraduate students were offered a chance to earn a very high bonus ($600) or a lower one ($60) by performing two four-minute tasks: one that called for some cognitive skill (adding numbers) and another that required only mechanical skill (tapping a keypad as fast as possible). We found that as long as the task involved only mechanical skill, bonuses worked as we usually expect: the higher the pay, the better the performance. But when the task required even rudimentary cognitive skill (as we might suppose in- vesting and banking do), the outcome was the same as in the Indian study: a potential higher bonus led to poorer performance.

Our results led us to conclude that financial rewards are often a two-edged sword. They motivate people to work well, but when these financial rewards get very large they can be- come counterproductive and actually hurt performance. If our tests mimic the real world, then higher bonuses may not only cost employers more, but also hinder executives in working to the best of their abilities.

And what do bankers thinks of these results? Back to Dan:

 

When I presented these results to a group of banking executives, they assured me that their own work and that of their employees would not follow the pattern we found in our experiments. 

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