Over-paid, over-motivated

The golden rule of economics is that incentives matter. However, this can be because they lead to worse performance, not better. That's the message of a fascinating new paper from the Federal Reserve Bank of Boston.
The researchers asked some rural Indians to play six games testing, variously, their memory, physical skills and creativity. They found that when they offered big incentives - a month's salary for very good performance - the players did worse than when they were offered smaller incentives.
This effect was not confined to Indians. Other experiments on students at MIT and Chicago showed the same thing - bigger incentives led to worse results.
This demonstrates the Yerkes-Dodson law. This says that the best performance in any task comes at moderate levels of arousal. When people are over-aroused, or concentrating too hard, performance falters.
It's easy to think of examples of this; many sportsmen choke under pressure, musicians perform best  with relaxed concentration rather than intense focus, golfers get the yips when they think too much about their action.
The same could easily be true in more orthodox economic contexts.For one thing, say the authors:

Attentional focus can be detrimental for tasks that  involve insight or creativity, since increased motivation tends to narrow individuals' focus of attention, and creativity and insight require drawing unusual connections between elements.

To all this, we can add this paper by Eric van den Steen, who shows that hyper-motovation can cause people to disobey orders, even in conditions in which they shouldn't. And then there's Colin Camerer's finding that cabbies work less in days when they're paid more.
The bottom line is that incentives can backfire.  Which raises the question. Could it be that the big salaries paid to chief executives  are due not to economic efficiency but simply to an uninformed prejudice that bigger pay must lead to better performance?

Comments

[Paddy Carter]

how interesting.

I wonder, though, whether being very highly paid is the same as being under pressure or concentrating to hard?

It's one thing to be confronted with a "get this right and you win millions" moment, but it is another to be sat there on a fat salary, and severance package etc. for taking lots of lunches and writing motivational emails to your staff.

Rather than putting me under pressure, I imagine I might find it quite relaxing - I'm loaded whatever happens.

Perhaps CEO's need such obscene pay packets because they perform better once they're relaxed?

[Dr. angry economist]

I ain't read the papers you mentioned - interesting in that, rather than diminishing returns to incentives that then flatten so there's no further returns from additional incentives, its a U shaped relationship where at the break point it becomes an inverse relationship.

Paddy's point above I can chime with slightly. e.g. if I am sitting in a $1m a year job (which I am not, as it happens, even including my public sector final salary scheme which too many folks seem to object to for some reason) then if I am of a certain age and experience, I pretty much know I can get a new job with the same or more pay. I.e. I am in that kind of salary ball park now and this sends signals in the labour market that I should be paid this, whether worth it or not.

I see this kind of thing in work every day, and even find myself thinking a bit the same (although try knocking a few zeros off), but at the same time actually working quite hard and effectively of course. Unless I am responding to blogs.

[Andrew Duffin]

I suspect that, with the taxi drivers, they know how much they need to "clear" each day to support their living expenses. A little more is nice, but once they've got that then the feeling is that anything more will just be "working for the taxman" - especially if it tips (oop npi) them over into a higher tax bracket. So they stop. Certainly that chimes with my experience of supervising hourly-paid employees. Beyond a certain point overtime is hard to sell - "I'd be into 40% if I did that shift - no thanks."

[Paddy Carter]

Andrew if you're talking about London cabbies they're into the 40% by about June aren't they?

[dearieme]

"big salaries paid to chief executives are due [to]" : didn't Galbraith say something to the effect of their being due to an entirely sincere sense of self-regard?