Is a bank chief worth 1,000 nurses? That provocative question arose earlier this year when it was announced that Bob Diamond, the chief executive of Barclays Bank, received a total income of around £25 million ($40m). That's enough to pay for an extra 1,019 nurses, 859 social workers or 2,165 care workers, according to figures produced by a leading trade union. The bumper pay packet came despite the bank's pre-tax profits falling 3% to £5.9 billion ($9.5bn).
Since the start of the ongoing financial crisis five years ago, politicians have been keen to bash bankers, rhetorically at least. President Barack Obama, for example, called excessive bonuses "obscene". While opponents of giant rewards to bankers and business executives tend to argue they are unfair on ethical grounds, those in favour usually shift the debate away from morality and towards more pragmatic ground, arguing they are necessary to attract, retain and incentivise talented staff.
While the behavioural sciences are of limited help on the ethics involved, the claim that multi-million pound pay packages boost performance is a separate and testable assertion. Performance-related pay has become so deeply ingrained that few question it. Most of us assume that offering people bigger financial rewards means people try harder. However a growing body of research in the fields of psychology and economics, and more recently neuroscience, paints a more complex picture of the relationship between money, motivation and performance.
Pioneering work in the field was carried out in the early 1970s by Edward Deci, a psychologist at Rochester University in New York. He found that students offered cash prizes to solve puzzles were less likely to continue working on them after payments had been made, compared to students who were offered no money. Deci's work helped clarify the relationship between intrinsic and extrinsic motivation - doing things because you like doing them in their own right or doing them because you want a reward that has been offered.
“People have three psychological needs – to feel autonomous, to feel competent and to feel related to others,” he says. Payment, according to Deci’s research, does not fulfill these needs. Over-emphasis on financial reward undermines autonomy and therefore intrinsic motivation, he says. “This [negative effect of money on motivation] matters hugely. You need high quality performance from bankers. You need thinkers, problem solvers, people who can be creative and using money to motivate them will not get you that.”
Perhaps more surprisingly some economists also question how good money is as a motivator. Dan Ariely, of Duke University, North Carolina, in the US, provides a compelling example. “If I ask you to help me change a tire on my car you might be willing to help, but if I offer you a dollar for this you don’t say to yourself ‘gee I get to help Dan and I get a dollar’. In contrast you say: ‘It’s a dollar, I don’t work for a dollar’ and you’re less interested in doing this.” In other words the introduction of financial incentives into a relationship by one party can undermine another's motivation to perform a task.
But maybe the small sums involved in Ariely’s example and Deci’s experiments undermine their application to real-world international business and finance. To address this, Ariely and colleagues, recruited villagers in India to play games testing memory, creativity and motor skills, offering three different groups four, 40 or 400 rupees per game for scoring highly. The maximum reward was equivalent to the amount spent by the average person living in rural India in five months. They found that those offered the highest incentives performed worst, earning an average of 20% of the maximum possible, compared to around 36% for those in the low and medium reward groups. “Our results challenge the assumption that an increase in motivation would necessarily lead to improvements in performance,” says Ariely.