Bonus Boom or Bonus Bust?

Wall Street bonuses have been captured under the media’s microscope since the the recession began in earnest, and most objective perspectives have called the billions in performance-based pay superfluous remuneration.

However, in a special report on bonuses, Forbes provides two insights that are easy to miss amid the cries of condemnation–the scientific and the insider perspectives.

Big Think’s Dan Ariely conducted an experiment that measured performance vis-a-vis the reward. Two groups of MIT undergrads had to complete mechanical and cognitive tasks in a set time period. Some of them were offered a $600 bonus while others were given $60. The results showed motivation and ability at odds. The mechanical tasks saw better performance by the group that was offered the $600. For the cognitive tasks, ones Ariely assumed bankers do, students offered the highest bonus suffered in performance. Ariely concluded that a larger bonus is a “double-edged sword.” Although they provide incentive, the incentive creates more  stress that diminishes performance.

In another article, My Bonus was Too Small!, an anonymous Wall Streeter argues that bonuses are worth it, that the numbers speak for themselves. 

“Yes, it’s hard to feel sorry for someone who makes more than $400,000 a year. But is it crazy to suggest that if I had a true, positive economic effect on my firm of $100 million dollars, that I should receive 1% of that number as compensation?” While Ariely would claim that such a bonus is detrimental to performance, the anonymous writer is not arguing efficiency, but rather, entitlement.

Despite the author’s defense of big bonuses, he concludes with a counter-point. A lack of economic incentive to join Wall Street could be beneficial in the long run. “We need our greatest math and engineering minds ensuring the United States is the leader in innovation in technology, energy and medicine. We don’t need them brewing up esoteric financial instruments.”