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Cash bonuses are better than raises for getting people to work harder, say Harvard researchers

Reuters/Jo Yong-Hak
Cash is the key.
By Lauren Davidson
Published Last updated This article is more than 2 years old.

Offering workers higher salaries doesn’t increase their productivity, according to new research from Harvard University. It causes employees to assume their previous salary expectations were wrong, and that the higher offer is the market rate. Thus, a higher wage doesn’t correlate with harder work.

But workers who were given extra money after they accepted a job—no-strings-attached cash perceived as a gift, not payment for services—were 20% more productive than those whose salary was increased, even though they were all earning the same amount.

The Harvard brains behind the study—researchers Duncan Gilchrist, Michael Luca and Deepak Malhotra—employed three groups of people to do the same one-time data entry task. They hired one group at $3 an hour, another at $4 an hour, and the third group at $3 an hour—but after these workers accepted the job, they were told that the budget was bigger than expected and they would be earning $4 an hour.

“Employees who were promised $4 worked no harder than those who were promised $3,” Malhotra told the Harvard Gazette. However, “those who were promised $3 but then later were given an additional $1 worked significantly harder than the other two groups.”

The researchers say the differences comes down to the perception of gifts. If the workers know the extra compensation isn’t mandatory, they are more likely to want to reciprocate the gesture, which they do by working harder. When it comes to paying for performance, $3 + $1 only equals $4 in the right context.

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