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Dan “Predictably Irrational” Ariely is promoting his new book, and as part of his promotathon, has published a teaser over at the TEDBlog.
The subject: banker pay.
Ariely’s argument will not go down well with the likes of the Johns Mack and Stumpf, or Phibro’s $100m man:
Recently there has been a public outcry against astronomical executive salaries. The basic public sentiment is that it seems unfair that people make so much money for mismanaging our money, especially when it is so difficult to see how bankers' talents and abilities justify their compensation…Not surprisingly, bankers have fought back, claiming that the high salaries are required to attract the best and brightest to crucial, high-stress, high-skill positions, and that the most talented and valuable bankers would go elsewhere if salaries were capped.
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Rather than seeing this as an ideological debate between self-serving bankers on one side and morally outraged taxpayers on the other, it is more useful to ask what we really know about the relationships between very large bonuses and job performance.
So Ariely and his team conducted a series of experiments, first in India and then at MIT.
Result? Emphasis FT Alphaville’s:
When we posed this question to a group of business students, naturally they expected performance to improve with the amount of the reward. In the business world this assumption is practically a natural law, and the logic that gets executives to command very high pay. But our experiment results revealed the opposite. As it turned out, the group offered the highest bonus did worse than the other two groups in every single task! And the people offered medium bonuses performed no better or worse than those offered low bonuses.
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We found that as long as the task involved only mechanical skill, bonuses worked as we usually expect: the higher the pay, the better the performance. But when the task required even rudimentary cognitive skill (as we might suppose in- vesting and banking do), the outcome was the same as in the Indian study: a potential higher bonus led to poorer performance.
How about that. The rest of the teaser at the TEDBlog is worth reading, as are the comments on the post. A sample of the latter:
This study is great as far as it goes, but it would not be good science to infer that it has any application to executive pay in the banking business, or any other business.
In my humble but considered opinion, this study shows that some people can not handle pressure. People that can handle performance pressure and do well are valuable in performing arts, sports, and business. For such people, the added pressure of great economic reward is just part of the equation.
Related links: Nomura triples pay for 10 executives – FT The missing shame gene – FT Alphaville Does banker pay matter? – Ezra Klein / Washington Post Banker eat banker, Frankfurt edition – FT Alphaville
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