The truth about bonuses

February 15, 2011

Bankers may well love them by the billion, but new research has claimed bonuses don't actually make us work any harder.

According to a study by at The University of Nottingham, fines are more effective than payouts when it comes to getting the most out of employees.

The finding emerged amid the continuing furore over the huge bonuses being paid to bankers in spite of global financial meltdown.

Last week Downing Street won only modest concessions in its bid to stop giving an estimated £7bn in extra payments to staff this year. The enormous figure has provoked widespread outrage at a time when the country is in the grip of cuts and austerity measures.

Now research by the University’s School of Economics suggests bonuses don’t even improve a worker’s productivity.

Experts in behavioral economics carried out a series of experiments to examine the effect of bonuses and fines on performance. The idea was to mirror not just a workplace scenario but other real-life situations such as tax inspections and even speed-limit compliance.

Study co-author Dr. Daniele Nosenzo said: “There are many situations where authorities have preferences over individuals’ choices. Regulators want factories to observe rules, police want motorists to observe speed-limits, and employers want employees to work hard. Exactly how authorities induce compliance when individuals have incentives to deviate from the desired behaviour is a fundamental problem.

“To study this we set up a novel experiment – the first of its kind, as far as we’re aware – to compare positive and negative influences.”

The study, involving more than 100 volunteers, was carried out at the School’s Center for Decision Research and Experimental Economics.

Subjects were assigned the roles of employers or workers and randomly paired over a number of rounds of an ‘inspection game’. In each round a worker had to decide whether to supply ‘high’ or ‘low’ effort, while at the same time the employer chose whether to ‘inspect’ the worker or not.

In some treatments the worker received a bonus for supplying high effort when inspected, while in others he was fined for low effort.

At the end of the experiments volunteers were paid a modest cash reward reflecting their performances and the bonuses and fines incurred.

Dr. Nosenzo, whose work focuses on how “social comparison” information affects behaviour, said: “We found paying bonuses didn’t encourage more effort. Employers tended to reduce the frequency of their inspections when they knew they would have to pay a bonus for high effort.

“This has a negative impact on encouraging working, which offsets any positive effect of bonuses. In fact, our subjects shirked slightly more often when bonuses were present. On the other hand, introducing harsher fines encouraged working. Shirking almost halved relative to a scenario without bonuses or fines. So it’s fines, not bonuses, that enhance efficiency.”

In fact, the joint earnings of employers and workers were almost 19 per cent higher when fines were handed out than when bonuses were paid. However, while employers were better off when fines were introduced, workers earned less than in the scenario without fines.

Prime Minister David Cameron recently threatened to introduce tough legislation to rein in bankers’ multi-million-pound payouts. But the coalition government eventually decided to back away from wider moves towards imposing a windfall tax or curbs on pay.

Ministers instead opted for a compromise that will publicise details of bonuses and set banks lending targets to kick-start the economy. Yet critics have dismissed the concessions secured under the Project Merlin agreement as “pitiful”, a “pantomime” and a “damp squib”.

At present the deal requires only that banks provide the details of their five best-paid employees below board level, though this may be reviewed next year.

Speaking at the weekend, Business Secretary Vince Cable insisted banks still face “fundamental surgery” in terms of structural reforms.

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not rated yet Feb 15, 2011
Bonuses are simply deserved as compensation for low wages and salaries. You don't work harder to get something you already deserve anyway.
not rated yet Feb 15, 2011
"introducing harsher fines encouraged working"--maybe, but more likely encouraged quitting. In today's team environment, low productivity can have many causes, often outside a worker's control.
This study sounds like BS to me.
not rated yet Feb 15, 2011

Bonuses are simply deserved as compensation for low wages and salaries. You don't work harder to get something you already deserve anyway.

I think you meant to say "You don't work harder to get something you THINK you already deserve anyway." Who's to say they deserve even 5% of what they're paid? But because they think they are entitled to thousands of times as much income as an average person, they expect it, don't work any harder to earn it, and find a way to get it even if it hurts society as a whole. Remember, the least competent people overestimate themselves the most. They overvalue themselves by orders of magnitude, which tells me that they must think they are much higher quality people than they really are...

not rated yet Feb 15, 2011
From what I have seen, I think bonuses only serve two purposes:
1) Attracting the most talented people with the lure of huge bonuses.
2) Allowing corrupt people to obtain huge amounts of money that they don't deserve.
not rated yet Feb 15, 2011
This article is about employers paying employees a bonus.

I think you two believe it is about a CEO getting a bonus.

I'm not aware of many "employees" who make "huge" amounts of money.
5 / 5 (1) Feb 16, 2011
This article is about employers paying employees a bonus.

I think you two believe it is about a CEO getting a bonus.

I'm not aware of many "employees" who make "huge" amounts of money.

Actually they are correct in their assumptions.

In the UK we have a big problem with investment bankers being paid huge amounts of bonuses, sometimes in the millions, yet they already earn a large salary and they're not CEO's.

It goes back to the perception issue except it's around the other way. The banks are convinced that if they don't pay these employees huge bonuses they'll go elsewhere and make lots of money for the competition.
not rated yet Feb 16, 2011
A CEO is an employee who the stock holders can fire if they so choose, I don't really see a lot of distinction between upper management and other employees in this case.

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