What do you think? Leave a respectful comment.

Why not give money instead of a gift? Evidence from the world of work

Paul Solman speaks with psychologist Dan Ariely about the surprising effect of monetary bonuses on performance.

With the holidays upon us and the end of the year approaching, lucky workers may be enjoying bonus season. Whether it’s the big checks offered on Wall Street or the retail shopping sprees some employers are now offering, bonuses are meant to reward and incentivize performance. But what kind of performance? In our 2010 Making Sense segment, “Modern Motivation,” author Dan Pink explains that material incentives motivate straight-forward, rote tasks since recipients adopt a laser-like focus on achieving the immediate objective. Creativity and innovation fall by the wayside. Swarthmore’s Barry Schwartz, for example, blames Wall Street bonuses for the 2008 financial crisis; the extra cash inspired myopic vision.

Duke psychologist Dan Ariely saw similar patterns in his research this year. In fact, when money is introduced into a variety of interactions — whether an employer gives a bonus to an employee or a daycare fines parents for being late — those relationships become more about exchanges and less about caring (or performing) for one another.

Ariely, a good friend of Making Sense, whom we featured prominently in our segment about teaching kids how to save, most recently appeared in our segment on the economic waste of Christmas gift-giving, explaining why non-monetary gifts are more socially acceptable. Money’s an awkward gift, and, as Ariely explains in the web-exclusive video above, a poor motivator.

Read the transcript of Paul Solman’s conversation with him below.

Dan Ariely: So one experiment we did was with a big chip manufacturer, and this was on their production floor. So people would come and make chips, and this is a good experimental set-up because you can measure how many chips they make.

And people come for four shifts: let’s call it Monday, Tuesday, Wednesday, Thursday. And then they have a few days off. And this company gives them a bonus on Monday, on the first day of the shift, if they perform above a certain level — kind of getting back into the workweek. On Tuesday, Wednesday and Thursday, there’s no bonuses, but on Monday there is. So people come, they work hard on Monday and so on.

So we convinced them to do a few other things. We convinced them to also have a control group, which means there’ll be some people who get nothing, no bonus. Some people, instead of a financial bonus, would get pizza sent to their home, and the idea is that this will make them heroes in the eyes of their family. And some people would not get money. They would not get pizza. They would get a nice text message from the boss, saying, “Work well done. ”

So let me ask you, on Monday, these three versions — money, pizza, text — which one does better?

Paul Solman: Well, I guess it would depend on how good a pizza or how much money. If you gave me thousands of dollars, I mean–

Dan Ariely: $25. It’s a bit more than the cost of the pizza.

Paul Solman: Uh huh.

Dan Ariely: And it’s a really good pizza.

Paul Solman: Well, I’ll go with the pizza, then.

Dan Ariely: They all do the same. So, money, pizza, text — doesn’t matter. They all do the same; they all do better than the controlled condition. But here’s the thing: what about Tuesday? Tuesday is the day after. There’s no bonus on Tuesday. But what we found was that the people who were offered the financial bonus on Monday now really drop their performance. The people offered the pizza drop a little bit. The people who were offered the text message drop just to the controlled condition, but not below that. So what happens is that when you give the money, motivation is high, as high as pizza and as high as a text, but the next day, you’re undermining motivation. So in total, this company, by giving money, decreased overall motivation and reduced the production capacity by about 5 percent.

Paul Solman: That reminds me of the famous daycare example that I’ve read about.

Dan Ariely: That’s right. So in this example by Uri Gneezy and Aldo Rustichini, they basically went to a daycare center and they said: Look, parents are late from time to time. Why don’t you give them a fine? [The daycare] said, great, let’s give them a fine. They give people a fine. What happens? Parents were more late. Why? Because before there was a fine, they basically were made to feel guilty. You came late to pick [up] your kid, the schoolteacher looked at her watch, looked at you; she made sure you realized you were late. You felt guilty, and that guilt would keep you from being late next time.

Now that it was money, you could say, oh, they’re charging me $5 an hour. I’m busy until 7 — they can keep my kid for three more hours.

So what happens is the moment you introduce money, you change the exchange. It’s now a cost-benefit, and parents were saying, we’ll be more late.

The most troubling part of this experiment was that after doing this for a while, they stopped the fine. And the question is, what will happen? Would guilt come back or not? It didn’t come back, because once you move to a financial relationship, guilt is gone. It doesn’t come back.

So we find a related finding in our manufacturing process, where you basically condition people and money, and all of a sudden, when money is not offered, they say, you know, I work for money. You’re not offering me money; I’m not working very hard.

Paul Solman: What you’re suggesting is sort of two separate, or different, mindsets: are we relating to each other objectively or subjectively?

Dan Ariely: I’m not sure I like the terms objectively and subjectively, but do we relate to each other in terms of an exchange — what I get and what you get — or are we relating to each other in the social sphere, which basically says, we will take care of each other and we’re not going to worry so much about the details. And it’s about the depth of caring, that is the issue.

Another thing that we did in the area of motivation is we worked with a call center. And these people at the call center get bonuses for performing well. And they gave us the data, and what we saw was it was the same people who were getting the bonus every week. You can have multiple theories about that, and one of them is that these are the people who care about money. Another one is that these are the good people, and so on.

So we convinced this company to give us the data and for us to determine who gets the bonuses every week. And how do you think we determined who would get the bonus?

Paul Solman: I have no idea.

Dan Ariely: Randomly. That’s how we do experiments. So we didn’t tell the people it was random. And then we compared what was the benefit to the company for giving bonuses to people at the top of the ladder compared to the bottom. And what we found was that the people at the bottom of the ladder were actually more motivated by the bonuses and the company made more money if they gave bonuses to the lower performers.

Paul Solman: You mean people who were lower performers who just randomly happened to be given higher bonuses according to your random scheme?

Dan Ariely: That’s right. They basically increased their motivation to a higher degree. Now, why is that?

When you think about top performers and low performers, you could say: Are the top performers performing well because they care about the money or because they just know what they’re doing? Imagine you were a good singer, and I paid you a little bit more and a little bit less. Would you sing differently? In fact, singing not properly might be more difficult for you. So the idea was that at the top of the scale were people who naturally were good at their job. They were not aided by the money; they were just good at it.

At the bottom of the scale, these were people who basically needed extra motivation. These were the people who were naturally not as good and could actually try harder. And, you know, so there’s the particular results of how you think about this, but, for me, the thought was that we… actually, when we give people bonuses and compensation, we rarely think about what’s holding them back.

What is the reason they are not performing well? Is it laziness? Is it they don’t have the extra motivation? Or is it the fact that they can’t do any better? So there’s lots of things like that.

Paul Solman: Well, this suggests laziness or lack of motivation.

Dan Ariely: No. It suggests that the top…

Paul Solman: You don’t have to worry about.

Dan Ariely: You don’t have to worry about. And at the bottom — these are people that could actually try harder, but because they never got the bonuses, they would never feel that they were connected to it. They were just not that motivated.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions

Support for Making Sen$e Provided By:

Support for Making Sen$e Provided By:

Latest News