The engaging behavioural economist Dan Ariely has just become a columnist for Wired UK and in his first article he describes how the promise of performance-related pay often backfires leading people to do more but perform worse.
To see the effect of bonuses on performance, Nina Mazar (assistant professor of marketing, Toronto University), Uri Gneezy (professor of economics and strategy, University of California, San Diego), George Loewenstein (professor of economics, Carnegie Mellon, Pennsylvania) and I conducted three experiments. In one we gave subjects tasks that demanded attention, memory, concentration and creativity. We asked them, for example, to assemble puzzles and to play memory games while throwing tennis balls at a target. We promised about a third of them one day’s pay if they performed well. Another third were promised two weeks’ pay. The last third could earn a full five months’ pay. (Before you ask where you can participate in our experiments, I should tell you that we ran this study in India, where the cost of living is relatively low.)
What happened? The low-and medium-bonus groups performed the same. The big-bonus group performed worst of all.
Link to ‘Bonuses boost activity, not quality’ in Wired UK.
Full disclosure: I’m a contributing editor to Wired UK. I have never received a bonus in my life, but if I do, I hope to spend it beautiful on women and fast cars, although, in reality, I will probably buy a laptop.
Mind Hacks 
Participants performed worse on the complex task when judgement from others was made more important. I’m wondering if some other effect could have facilitated this social behaviour…
By giving such a high reward, the task becomes stressful because it REALLY MATTERS. Stress affects arousal and performance in an inverted U shape (Optimal Arousal, Yerkes & Dodson 1908, YES 1908 people!)
The reward doesn’t always help people to perform is interesting, but very often overemphasized. It doesn’t help with creative or intellectual tasks, but for boring, straightforward or repetitive tasks, an external reward incentive does work (I have no references, but there is an entire industry, called SALES based on this premise).
Presumably if a task is dull, a small amount of stress as an external reward is helpful, whereas if a task is already interesting or challenging, the small amount of external stress then reduces performance. At least that would agree with Yerkes & Dodsons Optimal Arousal hypothesis.
Tom
The real questions is, how is performance effected when you are able to bring the world economic system to its knees and STILL get your huge bonus?