Paul Hebert recently reviewed Ariely’s latest book, The Upside of Irrationality on his i2i blog. Paul highlighted this very interesting twist on the impact of cash bonuses:
“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 effects 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.”
Why was the study structured this way? Because cash bonuses become an expectation. People begin to factor it into their “earned income” budgets. They expect to receive those bonuses at the end of the year, and the threat that the bonus might not materialize is enough to trigger deviant behaviors.
I can’t say I’m surprised by the findings. And that’s why I so strongly advocate against “If/Then” rewards – if you do this, you’ll get that. We’re in the business of “After/That” recognition – a surprise you’re not expecting when you do a job well. A sincere, specific appreciation of those efforts, but never something that you can come to expect.
Irrational. We’re human. To some extent we’re all irrational. But our job as HR pros in the workplace is to ensure that we’re not actively feeding that irrationality to the detriment of our firm.