Is there a hidden flaw in your pay-for-performance plan?

Financial incentives: The bigger the better, right? Maybe not.
Conventional wisdom tells us that the richer the prize, the harder people will work and the more productive they will become.
But new data from researchers at CalTech say that’s not what happens. After looking at brain-scan data of volunteers performing a specific motor task, the CalTech team says that what actually happens is that when the stakes become too high, people become worried about losing their potential prize.
The more someone is afraid of loss, the worse they perform, the researchers said.
A simple task seems to get harder
Here’s how CalTech explained the experiment:
Each participant was asked to control a virtual object on a screen by moving an index finger that had a tracking device attached to it. The virtual object consisted of two weighted balls connected by a spring.
The task was to place the object, which stretched and contracted as a weighted spring would in real life, into a square target within two seconds.
After a training period, the subjects were asked to perform the task while inside an fMRI machine, which measures blood flow in the brain—a proxy for brain activity, since wherever a brain is active, it needs extra oxygen, and thus a larger volume of blood. By monitoring blood flow, the researchers could pinpoint areas of the brain that turn on when a particular task is performed.
As expected, the team found that performance improved as the incentives increased—but only when the cash reward amounts were at the low end of the spectrum.
Once the rewards passed a certain threshold, which depended on the individual, performance began to fall off.
There’s a lot more — terms like ventral striatum and striatal activity are involved — but the bottom line is this:
The higher the potential reward, the higher the fear of losing that reward.
And that fear leads people to “choke” — screw up at the very moment they need to perform at their best.
So what’s that mean for your pay-for-performance plans? Maybe nothing. But if you’re finding that your best people are falling just short of their “reach” goals, maybe it’s time to dial things back a little.
You might find it pays off in the long run.