I stumbled across this really interesting and entertaining video of Dan Pink discussing the social science behind motivation and rewards. In the speech, he quotes some 2005 research where economists, D. Ariely et al, set a bunch of MIT students various tasks with varying levels of bonuses for success.
Their results were intriguing:
As long as the task involved only mechanical skill, bonuses worked as they would be expected: the higher the pay, the better the performance.
But once the task called for "even rudimentary cognitive skill," a larger reward "led to poorer performance."
These results have been borne out in many other studies too.
The logical conclusion of this research, if the bankers are right in that they need to be paid their huge bonuses, is that investment banking does not require even rudimentary cognitive skill. An interesting thought.
I'd recommend watching the whole video. It explains why, for most types of work, bonuses reduce performance rather than improve it and gives us all food for thought when it comes to rewarding our own employees.
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