Economics - General

Pay Enough or Don’t Pay At All

Jason Shafrin

Monetary incentives improve performance. This statement is almost gospel in the economics field. For instance, if I pay all my blog readers $1 for each time they visit this website, it is likely that the traffic on Healthcare Economist will increase dramatically. Sales staff compensated on a 100% commission basis often sell more items than sales individuals paid on a salaried basis.

Uri Gneezy (currently at UCSD’s Rady School of Management) and Aldo Rustichini conducted 2 experiments to show that paying more does not always improve outcomes. Below are a description of the two experiments and their results.

Experiment 1: University of Haifa Test

Undergraduates at the University of Haifa were asked to answer 50 questions from an IQ test. The students were separated into 4 groups, each of whom was paid 60 shekels (about $15) to participate .

  • Group 1: This group was asked to answer as many questions as they could.
  • Group 2: This group was paid 0.10 shekels (about 0.025 USD) for each question answered correctly
  • Group 3: This group was paid 1 shekel (about 0.25 USD) for each question answered correctly
  • Group 4: This group was paid 10 shekels (about $2.50 USD) for each question answered correctly.

Unsurprisingly, groups 3 and 4 preformed the best. It was found, however, that group 1 scored better than did group 2. This finding holds even when the 4 groups were compared based on the top and bottom quintiles.

Experiment 2: Charity Work

One hundred eighty high school students were divided into 3 groups during their annual charity drive. Students went door to door to solicit contributions for various chartitable organizations.

  • Group 1: This group was was given a motivational speech about the importance of the activity.
  • Group 2: This group received the speech as well as a payment of 1% of donations collected.
  • Group 3: This group received the speech as well as a payment of 10% of donations collected.

Surprisingly, group 1 preformed the best, while group 2 preformed the worst.

Authors’ explanation

The authors believe that their are two types of motivation: intrinsic and financial. Offering small financial rewards will reduce intrinsic motivation and only offer mild financial motivation. Offering large financial rewards will also decrease intrinsic motivation, but will strongly stimulate financial motivation. The authors state:

“The main conclusions of these studies were that positive rewards, in particular monetary rewards, have a negative effect on intrinsic motivation. If a person is rewarded for performing an interesting activity, his intrinsic motivation decreases. The negative effect is significant only if the reward is contingent on the performance; subjects who are paid a fixed positive amount, independent of their performance, do not display reduction in intrinsic motivation.”