Unknown title

News and Big Ideas

What do turn of the century lab rats, clutch NBA players like Michael Jordan, and Wall Streets highest-paid executives have in common? Dan Ariely[55] has some ideas.

We study the irrationality of people and markets. 2008 was a very good year for us, the behavioral economist noted wryly at the Poptech conference[56] on Thursday.

As pay czar Kenneth Feinberg prepares his plan to slash bonuses at bailed-out banks and automakers[57], perhaps its time to question ...

one of the central assumptions of the exec comp status quo: Does more compensation always make people more motivated and better at their jobs?

Arielys research suggests that past a certain level, it can have the exact opposite effect. People have the tendency to villainize Wall Street, Ariely said, but the real enemy is human nature.

The answer was yes, to a point. But past a certain level, the electricity became more of a stress than a motivator, and performance declined.

Ariely and his team took the so-called Yerkes-Dodson law [60]and applied it to people and financial incentives. Subjects were asked to perform certain tasks and received a monetary reward. Sure enough, the money increased cognitive performance to a point, and then became a drag.

Money is a two-edged sword, he said. Its a motivator and a stressor.

Their response?

They said, We are special people. Were not like everybody else, we thrive on stress, this is how we work, how we function, he said. I said, maybe youre right, but why dont we test it out? Come to the lab. They werent that interested.

Instead he turned to another high-stress, high-reward environment: The NBA. His team culled a list of perceived clutch players known and financially rewarded for having ice water in their veins when the game is on the line, and crunched their stats.

Ariel found the players did score more points than other players, butby taking more shots rather than improving their accuracy. This effectively juiced their stats like a mortgage broker signing up every loan applicant that walks through the door.

So what does this mean for executive compensation?

Arielys research shows that because of peoples strong propensity for loss avoidance, clawing back bonuses could dramatically increases the stress of financial incentives. Loss avoidance means that people fear losing a dollar more than they get pleasure in gaining one.

But even without clawbacks, the cost of maintaining a lifestyle of second homes, private schools and the like means that many of Wall Streets best-paid executives are already operating in loss-avoidance mode.

Surely some Wall Street banks would love to tell their employees that their bonus is being capped for their own good. Or maybe there is a customized, optimum salary for each and every person, based on their motivation and capacity for handling stress. But most of all Arielys research suggests that Kenneth Feinberg has a tough task on his hands.

One can only hope for the Pay Czars sake he isnt getting paid too much for the trouble.

We moderate all comments and will publish everything that advances the post directly or with relevant tangential

We try not to publish comments that we think are offensive or appear to pass you off as another person, and we will be conservative if comments may be considered libelous.information.

Thomson Reuters is the world's largest international multimedia news agency, providing investing news, world news, business news, technology news, headline news, small business news, news alerts, personal finance, stock market, and mutual funds information available on Reuters.com, video, mobile, and interactive television platforms. Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests.

NYSE and AMEX quotes delayed by at least 20 minutes. Nasdaq delayed by at least 15 minutes. For a complete list of exchanges and delays, please click here[103].

Hide