BONUSES-DO THEY WORK? LOOK AT THE EVIDENCE AND YOU MAY BE IN FOR A SURPRISE

BONUSES- DO THEY WORK?

Whether its teachers or other employees- do cash bonuses incentivise improved performance?

Evidence suggests not

Comment

The Ministry of Defence, last year, paid 57,000 employees a bonus. The MOD is widely seen as the most dysfunctional government department, quite apart from presiding over massive cuts to service personnel as its staff trouser more cash.   . It again raises an issue, yet to be addressed by our politicians and civil servants. (who so readily heap opprobrium on the private sector and particularly the City for its bonus culture,) over whether or not bonuses can be justified and are effective in incentivising employees to  raise their performance and productivity. The bonus culture has leached, in recent years, from the private sector into the public sector,  yet there is little evidence that departments are becoming more efficient or productive or ‘public value’ is improving.  Hard evidence in support of bonuses and their positive effects is, in fact , very hard to find.

Daniel H. Pink, the author of four provocative bestselling books about the changing world of work, gave a talk recently at the RSA on what motivates workers (see animated video below). He said that we are not as predictable as we seem when it comes to rewards and incentives- indeed, it is not easy to manipulate us by giving us cash rewards.   A Massachusetts Institute of Technology   study, funded by the Federal Reserve Bank, set a number of mental and physical challenges and tests to a group of students. Three levels of cash reward  were on offer for completion of the tasks- small, medium  and large .What the study found was fascinating. As long as tasks tested basic mechanical,  algorithmic skills, the higher the reward the better the result.   However, and this is key,  if the task involved even the most rudimentary cognitive skills- cash incentives demonstrably  did not work.

So extraordinary and unexpected were these results that they repeated the experiment in India just to double check.   Again similar and not insubstantial rewards were to be given for respectively low, medium  and high performers . The US results were repeated. Indeed, the bigger the cash incentives the worse the performance. The conclusion – complex -non-mechanical tasks requiring some creativity  do not benefit from cash incentives. If you want more widgets made on a production line…. then maybe.  So, why are we paying out as taxpayers  large amounts of cash to  civil servants  in the form of cash bonuses, while concurrently demonising city folk for doing the same, when the evidence is so threadbare to non- existent in support  of bonuses ?

If you don’t pay people enough salary  they wont, of course,   be motivated.  Pay people enough,  so that they aren’t worrying about their basic pay and can concentrate on work  and they will be Ok according to Pink . (How much is enough?)

Three factors lead to better performance in the work place -according to evidence- autonomy, mastery and purpose. Autonomy means- some sense of self-direction,  personal control and  independence of action in the work place .Mastery is the  urge to get better at stuff or self-improvement. This explains why people want for example  to learn to play an instrument.   And last -the purpose motive .Employees want a sense of purpose a feeling that what they are doing at work  is  good and worthwhile in the scheme of things . If the profit motive becomes un-hitched from purpose then bad things happen.

So what does Pink think about incentivising teachers to perform better through cash incentives ? Here is an extract from his blog:

‘One of the hottest ideas in education policy these days is tying teacher pay to student performance on standardized tests. The theory is that offering up cash bonuses will prompt unmotivated and unaccountable teachers to get their acts together and do better by our kids. The first comprehensive study of this approach, from the Nashville public schools, showed an effect somewhere between minuscule and non-existent. The students of incentivized teachers did no better than the students of teachers paid regular salaries.

Now an even bigger study is out from Roland Fryer, a prominent Harvard economist and an architect of some of these programs. In an impressive paper( published March 2011), he examines the effects of pay-for-performance in the New York City public schools. Here, from the paper’s abstract (and with italics added), are his key findings:

“Financial incentives for teachers to increase student performance is an increasingly popular education policy around the world. This paper describes a school-based randomized trial in over two-hundred New York City public schools designed to better understand the impact of teacher incentives on student achievement. I find no evidence that teacher incentives increase student performance, attendance, or graduation, nor do I find any evidence that the incentives change student or teacher behavior. If anything, teacher incentives may decrease student achievement, especially in larger schools.”

http://www.nber.org/papers/w16850

http://www.youtube.com/watch?v=u6XAPnuFjJc