A few years ago a NY hedge fund boss asked me a strange question. I thought it strange because I believe he knew in advance how I would answer, and how he would respond to my answer. And both of us knew that nothing either he or I said would make a blind bit of difference to how hedge fund bosses ran their businesses. The question was: What do you think of individual performance bonuses?
I conceded that I had no evidence on which to base an opinion. No study that I was aware of had attempted to measure the impact of individual incentive payments on hedge fund manager performance. However, I did insist that the presence of economic incentives sends a message, namely, that good performance is not expected without it. This might be acceptable in manual, routine jobs in which it is clear for everyone that the person is only doing it for the money. However, in creative, analytical jobs, where effort does not easily map to outcomes, the impact of incentives is less clear.
I also reminded him of the huge power of incentives. If he believes that teamwork is essential to long-term success, which he did, he should use individual incentives with caution. Also, if P&L is not the only measure of ‘good performance’ it should not be the only determinant for the incentive.
Well now, a new working paper published by CESifo Group Munich, describes a set of experiments designed to test the effect on group performance of incentive payments for non-routine, analytical tasks. The results reveal that team bonuses DO improve performance. The scientists also suggest that the means by which this was achieved was the team organization. “Teams facing incentives are more likely to wish for a leader, and leaders appear to emerge endogenously when teams face incentives.”