Do financial incentives really improve performance?

New research has thrown doubt on the belief that bonus schemes and putting workers under "pointless stress" actually works.

Do financial incentives really improve performance?
k performance is actually due to people’s biology, as opposed to extra effort or rewards, according to the latest neuroscience research by the Chartered Institute of Management Accountants (CIMA).
In fact, the study indicated that measures designed to encourage improved performance can possibly be a waste of time due to the inherent limits of the human brain.
The research involved measuring and analysing the participants’ brain activity, with functional magnetic resonance imaging (fMRI).
At the same time, the participants’ performed a series of computer-based tasks, measuring their ability to assess information under different time pressures and types of distractions.
The researchers distinguished between situations in which managers received a monetary reward for speed and accuracy, and a different scenario where managers experienced social pressures to perform well.
Interestingly, the result was that monetary incentives and social pressures result in people working harder, yet their performance did not improve for work which needed vigilance and attention.
If basic biology limits our ability to improve at certain types of work, we need to think more imaginatively about the way we measure and reward work performance, said Dr Frank Hartmann, Professor of Management Accounting and Management Control at the Rotterdam School of Management, Erasmus University.
“It may be much more task specific than we are currently inclined to think. Businesses need to recognise where performance limits may lie and avoid frustrating employees when results do not reflect best efforts,” he added.
“Organisations should take care that performance assessments accurately capture the efforts of workers, both to measure whether targets and incentives are effective and to ensure that individuals are rewarded fairly.”
Meanwhile, Dr Ian Selby, Director of Research and Development at CIMA, added that the study suggests too many companies are putting “pointless stress” on employees, not to mention wasting money on ineffectual bonus schemes.
“Clearly, for areas of their business which depend on vigilance and attention – such as governance or quality control – firms should consider alternative incentives,” he said.

“There is a wider point too. Modern companies have a large set of incentives available to them, yet many keep reaching for two in particular: exerting pressure from above, or incentivising through bonuses.”

Selby said that in many cases these tactics work, but as this research indicates, sometimes these are the wrong tools for the job.

“This is the equivalent of a builder trying to make an entire house using just a screwdriver and a hammer. The solution is for organisations to innovate. They must look at new ways to manage and incentivise people, using the same mindset as they would for product development.”

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