Do bonuses enhance performance?

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Dominik Grothe is in charge of the research infrastructure at LMU’s Faculty of Economics. Together with Professor Florian Englmaier, he has investigated the effectiveness of team bonuses for nonroutine tasks. These types of tasks require analytical skills and teamwork and are becoming increasingly important in the modern workplace. Their research shows that monetary incentives improve team performance and can influence how teams collaborate. In our interview, Dominik Grothe explains the potential implications for businesses.

We all get a salary for the work we do. Why do some companies pay bonuses on top of this?

Dominik Grothe: Bonuses are intended to motivate employees to go beyond their usual level of effort. It’s unclear, however, how effective bonuses are in today’s work environments, where employees are increasingly expected to perform analytical tasks in teams. In a team of software developers, for example, it’s difficult to precisely determine an individual’s contribution to team performance. When it comes to cognitive tasks, it’s very difficult to pin down in concrete numbers how much effort any given individual is making. In the end, only the result is visible. Therefore, we decided to do a study to investigate whether teams that work on nonroutine analytical tasks are motivated by bonuses and work better accordingly. The results show that when you give teams such an incentive, it does in fact improve performance.

You used an escape room for your study – a game where a group has to collectively find their way out of a locked room. What made you choose this device and how did you go about the experiment?

We were looking for a setting where several teams work on a nonroutine analytical task, where the performance is measurable, and where we could vary the presence of bonus incentives. Our colleague David Schindler had the idea of using an escape room for this purpose, as this activity requires teamwork and analytical thinking. We first conducted the experiment with regular customers of a provider in Munich. Some of the teams were given a bonus incentive of 50 euros if they managed to escape from the room within 45 minutes, while the control group was not given any incentive. The results show that the teams with a bonus incentive performed better: They were more likely to solve the task within 45 minutes, and they also solved it within the maximum time of 60 minutes more often.

Bonuses change the nature of collaboration

Why were these teams better than the others?

To get an answer to this question, we repeated the experiment with students, whom we could subsequently survey. It turned out that the organization of the teams changed: They endogenously formed around a leader, who coordinated the group.

What does this mean for everyday life in companies? In the real world, teams don’t usually pick their own leaders.

In many cases, modern workplaces lack clear leadership structures. Our findings might therefore be particularly relevant for agile teams and teams with flat hierarchies. In a follow-up study involving teams of students, we exogenously assigned a leader on a random basis and found that this was not effective. The teams that internally selected their own leader performed better. We’re currently analyzing the data to find out who was selected as the leader and what makes a good leader. To this end, we’re evaluating audio recordings as well as the movements of the participants in the room during the task.

The team knows who leads best

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Which was more decisive for the success of teams in your study: the bonus or the self-chosen leader?

It seems to be a crucial factor that someone in the group emerged to take on the leadership role and coordinate the team. The bonus likely served as the catalyst for this. The monetary incentive appears to foster a stronger collective interest among individuals and motivates them to act in a more coordinated manner.

Could companies benefit from supporting such endogenous structures?

Yes, it could be an approach for guiding teams toward greater satisfaction and higher performance. In another study featuring 3,000 HR experts, we found that the importance of choosing a leader for the success of a team tends to be underestimated. I’m convinced that such endogenous structures will grow in importance, particularly in young companies. In my view, it also aligns with the ideas of Gen Z, that a leader emerges organically from the group, and that this role can change depending on the task. However, as organizations grow larger, it becomes more difficult to maintain flat hierarchies.

Your findings seem to make a clear case for bonuses, or are there counterarguments?

Bonuses can also lead to stress. In our experiment with the students, we observed that they experienced a slightly higher level of stress in the bonus situation. And in our experiment, the task lasted only one hour. The question is: How does this change when the bonus situation continues for six months or a year? Does a bonus incentive merely induce employees to increase their performance, or does it also raise their stress levels, potentially leading to negative long-term consequences? These aspects are an important factor that companies should consider.

When wage differences are accepted

How important is transparency for bonus payments?

As soon as people start to compare themselves with others, and that’s often the case with monetary incentives, things get complicated. The crucial thing is how the bonus is structured: Is it awarded to the team or individually? Studies show that wage differences are accepted when accompanied by reasonable justifications. But transparency also has its risks. The key question remains: Can you convincingly justify differences in the size of bonuses? With routine tasks, it’s easy to identify, say, who was more productive. But how do you evaluate this for nonroutine tasks? The person came up with more ideas, wrote more code, did more analyses, or authored more articles? Such contributions are difficult to compare, especially when considering quality as well. However, when there is a solid justification and clear criteria, transparency is the better approach.

The bonus was granted once in your study. In companies, they are often paid out annually. Is there the danger that employees get used to the extra payment, such that the effect diminishes?

There are studies which show that performance and satisfaction initially increase with a pay rise, but that the higher salary quickly becomes the new reference point. Consequently, a short-term increase in productivity may decrease again. Additionally, the level of salary can also play a crucial role in how effective bonuses are. Beyond a certain salary threshold, other factors such as flexible working hours, a shorter working week, and family-friendly policies become more important. While monetary incentives were, and are, an important factor, companies today face the challenge of not only motivating employees to perform at higher levels but also attracting and retaining talent over the long term.

Publication:

Florian Englmaier, Stefan Grimm, Dominik Grothe, David Schindler, Simeon Schudy: The Effect of Incentives in Non-Routine Analytical Team Tasks. In: Journal of Political Economy 2024