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Dan Ariely published a book last year that every manager in the world should read, especially the ones with huge salaries:  “Predictably Irrational”

When we make decisions we think we’re in control, making rational choices. But are we? Entertaining and surprising, Ariely unmasks the subtle but powerful tricks that our minds play on us.

In that book, he explains why people perform better or worse when there is a huge bonus in their pay. If the work is mostly mechanical, a huge bonus makes you perform better. But if your work is cognitive, the performance is worse than without a bonus.

One reason is that you can handle the additional stress (higher expectations, greed for the money, etc.) of a huge bonus better when you don’t need your brain for something important at the same time. Imagine that the stress of the huge bonus occupies just 5% of your brain power. Without the bonus, you’d perform at 100% instead of at 95%.

Most companies pay bonuses because of the huge workload and risk. Say the bonus is linked to achieving some goal. Imagine manager A would get a bonus but unfortunately, he won’t because person X made a mistake. This is a likely situation: High risk, remember?

What happens now?

Manager A might be angry that he doesn’t get the bonus because of X. That time is wasted. Not only didn’t he achieve the goals, he’s wasting time moping about an incentive he won’t get. Not what we want.

Or he might be tempted to cover up X’s blunder. This time, the incentive corrupts him. Definitely not what we want.

Or manager B might get a bigger bonus which A finds unfair. He might be tempted to sabotage B or at least spend some time moping why the world is so unjust.

Even when he gets the incentive, every minute he spends thinking about it is a minute lost to the company.

Incentives work perfectly for brain-dead work like repetitive, manual labor where your brain is idle and easily distracted. Here, the incentive gives you an extra reason to concentrate on the job.

But if your job includes making complex decisions, the incentive reduces the amount of mental work that you can do because it distracts you!

Related Articles

• Bonuses don’t motivate – Video (empwaynek.wordpress.com)
• Dan Ariely and Behavioral Economics (Part I) (ozankocak.com)
• Book Review: Predictably Irrational: The Hidden Forces That Shape Our Decisions — Revised and Expanded Edition by Dan Ariely (blogcritics.org)
• Dan Pink: The puzzle of motivation (TED talk with lots of pointers to current research supporting the above)
• Candle Problem is a psychological experiment invented by Karl Duncker that shows how an incentive gets in the way of performance.

This entry was posted on Thursday, March 3rd, 2011 at 20:38 and is filed under Philosophy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.