(a) This is your brain.
(b) This is your brain on incentives.
What can we possibly learn about incentive compensation from functional magnetic resonance imaging (fMRI)? Perhaps the answer to a question that has been dividing us for more than 5 decades: what is the relationship between pay and performance?
There is no shortage of research and data on either side of this questions. Multiple studies have demonstrated a positive relationship between pay and performance: the introduction of monetary incentives induces greater effort and results in better performance. Other studies have demonstrated a negative relationship: introducing monetary incentives undermines intrinsic motivation, leading to reduced performance.
Based on some new research in the field of neuroscience, the divide may stem from the fact that we are approaching the question from the wrong direction - it's not the introduction of incentives, but rather their removal, that impacts performance.
Tina Strombach, Marco Hubert and Peter Kenning performed an experiment using functional magnetic resonance imaging (fMRI) to explore how monetary incentives affect actual performance and how changes in incentives present themselves in underlying neural activation. Participants in the study were shown simple math questions with proposed solutions, and were asked to indicate whether the solution was correct or not. Questions were divided into blocks:
- Block 1 - no feedback on performance
- Block 2 - feedback on performance and a reward of 2€ for each correct answer
- Block 3 - no feedback on performance, no monetary reward
- Block 4 - feedback on performance and a reward of 2€ for each correct answer
The authors summarize one of the key findings of their study as follows:
On a behavioral level, we found a significant decrease in performance in response to the removal of monetary incentives. Overall, we were able to confirm our hypothesis that taking a monetary reward away leads to decreased performance. Interestingly, no changes in performance due to the introduction of monetary rewards were observed.
Thinking about our own experiences, this should come as no surprise - it's completely consistent with our tendency as human beings to strongly prefer avoiding losses to acquiring gains. In fact, some studies have shown that psychologically, losses are twice as powerful as gains!
What does this mean for our performance pay programs? Simple - think about the long term before acting in the short term. The decision to introduce a performance pay program should not be taken lightly. It requires a strong commitment, both in terms of the time spent in designing, implementing, and communicating the program and in terms of what future compensation expenditures might be. It's not a decision that should be entered into lightly, from a "let's try it and see what happens" mindset. If you try it out and then decide to scrap the program, the subsequent decline in performance that may occur cannot be chalked up to an unanticipated consequence. You now know what might happen. Your employees will respond to your performance pay program, especially if it's taken away.
Stephanie Thomas, Ph.D., is a Lecturer in the Department of Economics at Cornell University and the Program Director for the Institute for Compensation Studies (ICS) at Cornell’s School of Industrial and Labor Relations. Throughout her career, Stephanie has completed research on a variety of topics including wage determination, pay gaps and inequality, and performance-based compensation systems. She frequently provides expert commentary in a media outlets such as The New York Times, CBC, and NPR, and has published papers in a variety of journals.
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