The impact of financial incentives on decision making: Further evidence (2008)

This report, published in 2008, looks at financial incentives in the workplace - and builds on a previous study from 2006.

The impact of financial incentives on decision making: Further evidence (2008)

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Do financial incentives improve decision making and motivate performance? The use of financial incentives is widespread and believed to work but what evidence is there to support their continued use?

This research furthers the work undertaken by the authors on financial incentives published by ICAS in 2006.

The project takes a laboratory experiment approach to test the theory that formal performance related rewards increase the use made by decision-makers of valuable information and, in turn, lead to improved decision-making.

The study varied from the 2006 work in three ways:

Earnings were denominated directly in money
There was no time cost involved and
Participants were randomly assigned different incentives.

The experiment found that profit performance was strongly and significantly related to the level of profit-related incentives.

The research highlights the importance of individuals understanding the structure of incentives for incentives to be effective.

The research also identified that, irrespective of incentives, individuals perform better when they have an intrinsic interest in something or wish to please.

Therefore, recruitment of the "right" individual for the job remains a key factor in performance. Although the results of this study are based on an experiment or "business game", they have wider implications for the business community.