Would you expect that larger bonuses lead to better or worse performance than smaller bonuses? The results of an experiment carried out by Dan Ariely and collaborators suggests that bigger bonuses may produce worse performance of tasks needing thinking skills. These counter-intuitive results were discussed on this morning's Today programme.
This experimental result, if confirmed, will become an important factor in assessing corporate reputations because bonus levels are so easily visible from the outside. Very high bonus levels for those using cognitive skills may become a predicter of poor performance and thus a poor reputation.
More work is needed to confirm the experimental result. But as it happens, the world's biggest investment banks are overhauling their pay structures to differentiate between European and other bankers. This will neatly create, the experimental conditions needed to confirm, refine or debunk Professor Ariely's initial results. Particularly when it comes to the relationship between base pay and bonuses.
In the meantime the results are food for thought for everyone involved in designing or considering the effects of bonus systems.