Why cash bonuses make people work harder than raises

It's not just about what you pay employees, but how you pay employees.
Written by Tyler Falk, Contributor

How can you get the most out of your employees?

According to new research from Harvard University, it's cash bonuses or unexpected cash gifts, not above-market salaries, that motivate people to work harder.

The field research consisted of 266 people, split into three groups, who were hired using oDesk.com, a website that allows you to recruit freelancers from around the world. The first group was offered $3 per hour. The second group was offered $4 per hour. (None of the groups had knowledge of the other groups and all were previously making less than $3 per hour.) When the productivity of these two groups was compared there was no statistical difference, leading to the conclusion that a higher wage doesn't necessarily lead to better performance.

"When someone is paid $4 even though it is more than they are used to making or expecting, there may be no reason for them to interpret this as a gift or concession from the employer," Deepak Malhotra, a co-author of the study and professor at Harvard Business School, told the Harvard Gazette. "More likely, they just assume that their expectations were wrong, and $4 is the going rate for this type of work."

However, a third group was initially offered $3 per hour but was then offered a surprise $1 per hour increase and was significantly more productive. The researchers say that the "gift" group was about 20 percent more productive than the other two groups. Why?

"We attribute this to the salience of the gift: It was obvious to them that we didn't have to give this additional compensation, but that we had chosen to," said Malhotra. "[The gift] signaled that we had done something nice for them which they may want to reciprocate."

The lesson here: it's not just about what you pay employees, but how you pay employees.

[h/t Quartz]

Photo: Flickr/Iain Browne

This post was originally published on Smartplanet.com

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