TY - JOUR
T1 - On the Psychology of Bonuses
T2 - The Effects of Loss Aversion and Yerkes-Dodson Law on Performance in Cognitively and Mechanically Demanding Tasks
AU - Elbæk, Christian Truelsen
AU - Nørhede Lystbæk, Martin
AU - Mitkidis, Panagiotis
PY - 2022/6
Y1 - 2022/6
N2 - Monetary bonus schemes are one of the most well-used forms of employee compensation in the modern business world, but are primarily constructed using gains to incentivize an increase in work effort and performance. Using insights from behavioral economics, we construct a novel extrinsic compensation system modelled after Loss Aversion and the Yerkes-Dodson Law. We test this system using two experimental designs that measure performance based on cognitive- and mechanical efforts, respectively. In experiment 1 we find no difference in cognitive performance between 4 different bonus schemes. In a pre-registered experiment 2 we find that no difference in mechanical performance between 4 different conditions. Contrary to previous research, our findings suggest no significant effect of bonus schemes modelled after Loss Aversion and Yerkes-Dodson Law, whether administered alone or in combination. We discuss limitations and implications for compensation design and research.
AB - Monetary bonus schemes are one of the most well-used forms of employee compensation in the modern business world, but are primarily constructed using gains to incentivize an increase in work effort and performance. Using insights from behavioral economics, we construct a novel extrinsic compensation system modelled after Loss Aversion and the Yerkes-Dodson Law. We test this system using two experimental designs that measure performance based on cognitive- and mechanical efforts, respectively. In experiment 1 we find no difference in cognitive performance between 4 different bonus schemes. In a pre-registered experiment 2 we find that no difference in mechanical performance between 4 different conditions. Contrary to previous research, our findings suggest no significant effect of bonus schemes modelled after Loss Aversion and Yerkes-Dodson Law, whether administered alone or in combination. We discuss limitations and implications for compensation design and research.
KW - Bonus schemes
KW - Extrinsic compensation
KW - Loss aversion
KW - Preregistered
KW - Yerkes-Dodson law
UR - http://www.scopus.com/inward/record.url?scp=85126565876&partnerID=8YFLogxK
U2 - 10.1016/j.socec.2022.101870
DO - 10.1016/j.socec.2022.101870
M3 - Journal article
SN - 2214-8043
VL - 98
JO - Journal of Behavioral and Experimental Economics
JF - Journal of Behavioral and Experimental Economics
M1 - 101870
ER -