Sunday, 2 November 2014

Why a bonus might be a bad idea

You have a business problem to solve or a new project to get live. In order to make sure your people deliver, you decide to offer a bonus, stock options or some other incentive to get the job done. This might be a really bad idea and here is why.

Way back in 1945 Karl Duncker had his candle problem experiment posthumously published. It was a task based on problem solving. Participants were given a candle, some matches and a box of tacks. They were then asked to fix the candle to a cork board on the wall. They needed to do it in such a way that when lit, the candle wouldn't drip wax on the table underneath the cork board.

The solution (spoiler alert), is to use the box holding the tacks as a candle holder, attach the box to the wall and put the candle in it. Most people solve this eventually but they solve it a lot quicker if the tacks are out of the box and the box is seen as a separate piece of equipment.

When the tacks were in the box the participants saw it only as a tack-box, not something they could use to solve the problem. This phenomenon is called ‘Functional fixedness’.

Sam Glucksberg added a very interesting step to this in his 1962 paper, “Influence of strength of drive on functional fixedness and perceptual recognition”. He decided to incentivise people to solve the candle problem. One group got money for solving the problem, the quicker they solved it, the more money they got. Another group were offered nothing, they were just asked to solve the problem.

When the tacks were presented outside the box (making the solution more obvious) the group that were incentivised out-performed the group that were paid nothing. This is what we would expect, rewarding results improved performance.

However, when the problem was presented in its more complex form with the tacks in the box, the incentivised group did significantly worse than the group paid nothing. Incentives killed performance and results. The bonus for getting it right back-fired big time. Participants with no financial incentive took 7:41 minutes to solve the problem, the people who were incentivised, took 11:08 minutes to solve the problem.

Glucksberg found that not only did the financial incentive make people slower at problem solving, the slowness increased with the incentive. The higher the monetary reward, the worse the performance. This was not a one off, the result has been replicated over and over in other experiments.

The key point is that incentives narrow our focus. When participants are incentivised, they can’t see the solution to the problem (the box holding the tacks). They think mechanically not creatively. Narrowing our focus inhibits this creative thinking and gets us straight into the task as we see it.

The lesson here is that if your employees have to do something straightforward, like putting regular parts together or following a specific instruction on an assembly line, financial incentives work well for these mechanical tasks.

However when we need do something that requires any creative or critical thinking, financial incentives damage performance. When we need to think out of the (candle) box, offering a financial incentive keeps our focus in the box. We don’t see the big picture and solutions prove more elusive.

For the types of jobs many people have in the 21st century knowledge economy, bonuses and incentives are a bad motivator. Worse than not getting results, they damage performance, it’s not that they don’t do any good, they actually do harm.

Giving a bonus to software developers to get a project delivered on time or Business Development Manager to get a new commercial product live or a Marketing Executive to hit a sales figure are all the types of tasks that Glucksberg and others have shown, suffer when people are incentivised.

This has been well documented and repeated since 1962 and yet pretty much ignored in most management strategies. It is a mistake that companies continue to make today, more than 50 years since Glucksbergs first publication. 

It could go some way in explaining the disastrous performance of our banks, which had a well embedded bonus culture in senior management, the guys who should have been watching the big picture. It may explain why many well-funded start-ups disappear shortly after venture capitalists arrive. Most VC funding involves the current management staying on for a while and the company or its share price hitting incentivised targets for set time period. The creative thinkers that set up and got the company going now have their creative thinking dimmed and their focus narrowed by VC penalties or bonuses.

The next time you offer or are offered a bonus think again. Fifty years of research suggests that you will lose sight of the big picture and your days of thinking outside the box could be over.

Daniel Pink has an excellent TED talk which covers this and is well worth a listen.

1 comment:

  1. Wow... a very gud example to be a entrepreneur... but what should be the motivating factor for the critical thinkers or rather I should say where u need use employees to there brain..