Pay For Performance? – productivity, performance anxiety syndrom, etymology of motivation?
Approach of economists:
The surprising thing in this literature is not that productivity seems to go up when there is pay for performance, it is that it goes up by so much. It is not unusual to see productivity numbers going up by 25 per cent to 35 per cent. The most cited study that everybody talks about in this context concerns a company called Safelite. This study was conducted by Ed Lazear (Lazear, 2006). One evening Ed Lazear ended up sitting on a plane next its CEO. Safelite does one thing, if you are in a car accident and your windshield gets broken, they replace your wind shield. Over the space of three hours on the plane, the CEO decided to radically change the compensation of its windshield installers from monitoring by supervisors to commissions. Productivity went up by about 35 per cent. For other examples of such work illustrating effects on performance, see my 1999 survey.
Approach of psychologists:
On the other hand, there is a psychology literature that is going in a radically opposite direction, where it is argued that if you pay somebody on the margin to do something they will actually do less of it. As this is such a dissonant message to the economic’s viewpoint, let me begin by explaining why I think the psychology evidence needs considerably more generality before these claims can truly be at a stage where it overturns the economic work above. The experiments remain very interesting and help us understand psychological influences surrounding pay, but I do not think that they translate to most of the cases that we care about.
1.There are two central ideas that argue that sometimes pay for performance backfires in its most fundamental sense. So let me start with the example: suppose that you are a golfer and you have to make a putt that is four feet. In the first case, if you make that putt you get €5, and the second case if you make that putt you get €5 million. In which of the two are you more likely to make the putt? So think about the economic example. The economist would say that because it is worth €5 million to me I concentrate more on making the putt and I am more likely to make it. What psychologists argue is the opposite. While they may agree that the golfer wants to do better when €5 million is on the line, they argue that he may not be able to translate that desire into performance due to a physiological response to the stakes. Specifically, there could be a nervousness effect or an arousal effect whereby he becomes so nervous because its worth €5 million that he misses, he is more likely to miss.
Something I would call performance anxiety syndrom.
2.The second version of what psychologists often talk about in the context of agency theory is what happens in circumstances where you intrinsically enjoy something. The idea here is simply that once you are being paid for doing something you inherently enjoy it less. So without pay for performance I am in ‘I think I am doing this as it is fun’ mode – when I get paid, now I am doing it for the money. If that attribution is important enough then what happens is people can end up working less hard. So in my language, this is the cost of working hard. Going back to the basic model, the objective function of the agent is then to maximise.
This point would relate probably to etymology of motivation.
The score is 2 against 1.
Practical research welcomed. If any of you has any data to share in this matter feel free to contact me zbigniew.gargasz@gmail.com
source: The Economic and Social Review, Vol. 42, No. 2, Summer, 2011, pp. 113–134
What Have We Learnt About Pay For Performance?
Geary Lecture Winter 2010CANICE PRENDERGAST*
University of Chicago, USA
http://www.esri.ie/UserFiles/publications/jacb201139/GLS40.pdf
