Big Money Bonuses Make Performance Suffer

I recently stumbled across PsyBlog, a very interesting blog on a wide range of psychology studies. A particularly intriguing entry for me was “Do Big Money Bonuses Really Increase Job Performance?”, based on a 2004 study titled “Large Stakes and Big Mistakes”*

The study leaders hypothesized that the anticipation of big bonuses for job performance may actually be counter intuitive by placing too much emphasis on money and not on the task at hand. To test their theory, the behavioral economists tested people in a low standard-of-living market (rural India) and in a high market (students at MIT). Both groups were given tasks to test problem-solving, concentration and creativity skills, with various levels of monetary reward offered for success.

The results were surprising to the researchers – according to the blog entry “in eight of the nine tasks, the promise of a bigger bonus actually significantly decreased people’s performance.”

Globoforce has long advocated the value of non-cash over cash rewards for performance. This research further supports our position in this area as well as our best practice recommendation that employee recognition take precedence over reward. Far greater benefit to the company and to the employee is derived when the employee is frequently recognized for desired efforts – even with a simple “thank you” – than with a single large monetary reward.

Have you evaluated or measured the impact of large infrequent or annual bonuses vs. frequent and timely recognition? You may be surprised with the results.

* Reference: Ariely, Dl, Gneezy, U., Lowenstein, G., & Mazar, N. (2004), CMU Working Paper.