Big bonus equals hard work?

March 8th, 2011

Bankers may love them, but new research has claimed bonuses don’t actually make us work any harder.

According to a study by economists at the University, fines are more effective than bonuses 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.

Downing Street won only modest concessions in its latest bid to stop banks giving an estimated £7bn in extra payments to staff this year.

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

Experts in behavioural economics carried out a series of experiments to examine the effect of bonuses and fines on performance.

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 Centre for Decision Research and Experimental Economics. Subjects were assigned the roles of employers or workers and randomly paired over a number of rounds. 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.

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