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When performance-related pay backfires

Performance-related pay often does not encourage people to work harder and sometimes has the opposite effect, according to new research due to be unveiled at the London School of Economics and Political Science.

An analysis of 51 separate experimental studies of financial incentives in employment relations found overwhelming evidence that these incentives may reduce an employee's natural inclination to complete a task and derive pleasure from doing so.

'We find that financial incentives may indeed reduce intrinsic motivation and diminish ethical or other reasons for complying with workplace social norms such as fairness. As a consequence, the provision of incentives can result in a negative impact on overall performance,' said Dr Bernd Irlenbusch from the LSE's Department of Management.

Photograph of a computer mouse on top of moneyThe research concludes that companies should be aware that the provision of performance-related pay could result in a net reduction of motivation across a team or organisation. How to design effective workplace incentives is set to be a hot topic for behavioural economists in the coming years.

The results of the study, by Professor Sam Bowles of the Behavioural Sciences Programme at Santa Fe Institute, will be announced by him and discussed at an innovative workshop jointly organised by LSE, UCL and the University of Nottingham. The event, designed to bring together academics, company executives and HR managers, will take place between 9am and 6pm on Tuesday June 30th.

"By assembling highly credited experts with different backgrounds, this workshop provides one of the rare opportunities for cross-fertilisation between theory and practice," added Dr Irlenbusch.

Another key speaker will be Michael Kramarsch, managing director of Towers Perrin Germany, who has more than 15 years of experience in consulting leading European companies on the design of incentive and compensation schemes.

Shorter presentations by world-leading researchers will highlight new results on related aspects, like the negative effects of incentives on engagement, cooperation, social preferences, social status, and reciprocal behaviour of employees. For example, Dr Oriana Bandiera of the LSE's Department of Economics will present new evidence that incentives lead high ability workers to form teams with similarly skilled colleagues instead of workers they are socially connected to. However, socially connected workers are better able to overcome free-riding. As a consequence, increased incentives can reduce the firm's average productivity.

The initiative is being funded by the Sixth Framework Programme of the European Commission.


Journalists are welcome to attend all or part of the workshop, which takes place in Room A318 at the LSE's Old Building in Houghton Street. If you are interested in attending, please email Joanna Bale, Senior Press Officer, at j.m.bale@lse.ac.uk or call 07831 609679.

To interview Dr Irlenbusch, please email him at b.irlenbusch@lse.ac.uk or call 0207 955 7840 (office) or +49 171 48 172 49 (mobile).