because now my sunday school kids are facebook friends...

i can always count on nytimes for articles to make me really mad

What’s the Value of a Big Bonus?

Durham, N.C.

BY withholding bonuses from their top executives, Goldman Sachs and UBS may soften negative reaction from Congress and the public if their earnings reports in December are poor, as is expected. But will they also suffer because their executives, lacking the motivation that big bonuses are thought to provide, will not do their jobs well?

Of course, there are many reasons to be disgusted with executive pay. It feels unfair that so many people make so much money managing our money, and it is often difficult to see how their talent and abilities justify their compensation. We find it particularly offensive when executives receive high bonuses after disastrous performances. But doesn’t the promise of a big bonus push people to work to the best of their ability?

To look at this question, three colleagues and I conducted an experiment. We presented 87 participants with an array of tasks that demanded attention, memory, concentration and creativity. We asked them, for instance, to fit pieces of metal puzzle into a plastic frame, to play a memory game that required them to reproduce a string of numbers and to throw tennis balls at a target. We promised them payment if they performed the tasks exceptionally well. About a third of the subjects were told they’d be given a small bonus, another third were promised a medium-level bonus, and the last third could earn a high bonus.

We did this study in India, where the cost of living is relatively low so that we could pay people amounts that were substantial to them but still within our research budget. The lowest bonus was 50 cents — equivalent to what participants could receive for a day’s work in rural India. The middle-level bonus was $5, or about two weeks’ pay, and the highest bonus was $50, five months’ pay.

What would you expect the results to be? When we posed this question to a group of business students, they said they expected performance to improve with the amount of the reward. But this was not what we found. The people offered medium bonuses performed no better, or worse, than those offered low bonuses. But what was most interesting was that the group offered the biggest bonus did worse than the other two groups across all the tasks.

We replicated these results in a study at the Massachusetts Institute of Technology, where undergraduate students were offered the chance to earn a high bonus ($600) or a lower one ($60) by performing one task that called for some cognitive skill (adding numbers) and another one that required only a mechanical skill (tapping a key as fast as possible). We found that as long as the task involved only mechanical skill, bonuses worked as would be expected: the higher the pay, the better the performance. But when we included a task that required even rudimentary cognitive skill, the outcome was the same as in the India study: the offer of a higher bonus led to poorer performance.

If our tests mimic the real world, then higher bonuses may not only cost employers more but also discourage executives from working to the best of their ability.

We later did a variation of the same experiment, at the University of Chicago, to look at a different kind of motivator: public scrutiny. We asked 39 participants to solve anagram puzzles, sometimes privately in a cubicle and sometimes in front of the others. We reasoned that their motivation to do well would be higher in public, and we wanted to see if this would affect their performance. But we found that while the subjects wanted to perform better when they worked in front of others, in fact they did worse.

So it turns out that social pressure has the same effect that money has. It motivates people, especially when the tasks at hand require only effort and no skill. But it can provide stress, too, and at some point that stress overwhelms the motivating influence.

When I recently presented these results to a group of banking executives, they assured me that their own work and that of their employees would not follow this pattern. (I pointed out that with the right research budget, and their participation, we could examine this assertion. They weren’t that interested.) But I suspect that they were too quick to discount our results. For most bankers, a multimillion-dollar compensation package could easily be counterproductive. Maybe that will be some comfort to the boards at UBS and Goldman Sachs.

prosperity gospel

Renewable energy regulations may miss the mark, says MIT graduate student

Research shows different approach is needed

David Chandler, MIT News Office
October 1, 2008

Well-intentioned rules passed by many states to combat climate change through the development of renewable energy technologies may not achieve the intended effects and may even be counterproductive, according to research by an MIT graduate student. But the problem is easy to fix: A modified set of regulations could be much more effective, the study found.

At least 25 states have enacted renewable portfolio standards (RPS), which require electric utilities to obtain a certain percentage of their power from renewable sources by a certain date (such as "20 percent from renewables by 2020"). But these standards will not achieve the desired effects and may actually end up delaying some of the most promising renewable-energy technologies, the study found.

Michael Hogan, the student who carried out the study as part of his master's thesis work in MIT's Environmental Technology and Public Policy Program, says that such standards push investments much too heavily toward technology that is already well proven and close to being economically competitive, especially land-based wind power. In the process, technologies that may have much more potential to replace coal plants in the longer term, such as solar thermal systems and offshore wind, get short shrift.

Current RPS programs, Hogan found, "are likely to play at best a very marginal role at an unnecessarily high cost in delivering the necessary reductions in greenhouse gases, with little in the way of long-term technological development benefits." But by introducing a few refinements to these programs, he says, it is possible to greatly improve the chances that they will achieve the desired results.

Hogan's professional background is tailor-made for this line of research: He spent 28 years in the energy business, including leading roles in starting and running a number of energy companies and organizations, before deciding to resume his education with the MIT Department of Urban Studies and Planning master's program. During his years in the energy business he was responsible for the development of more than $8 billion in energy-related assets in seven countries.

The central problem, Hogan says, is that 80 percent of U.S. carbon dioxide from electricity generation, and about a third of the nation's overall emissions, come from just 620 coal-burning power plants. Thus, any attempt to reduce greenhouse gas emissions must focus squarely on addressing these plants. "In a very real sense," he writes, "nothing else matters."

While RPS tends to foster investment in wind farms, these almost never displace baseload coal-fired plants, he says, which is the key objective. Among other changes, he proposes that the rules be modified to create "bands" of technologies, based on their degree of commercial readiness, and that the regulations should strongly favor promising but still early stage technologies. Encouraging investment in technology that won't produce results until later in the process could actually foster much more significant progress, he says. "We have to bet on all the horses," he says.

In addition, it is important to recognize that rules should be tailored to the conditions in particular parts of the country, he says. For example, while land-based wind dominates the upper Midwest, solar thermal systems should be favored in the Southwest, deep-offshore wind in the Northeast, and biomass in the Southeast.

Lawrence Susskind, Ford Foundation Professor of Urban and Environmental Planning and Hogan's thesis adviser, says his student has demonstrated that renewable portfolio standards "are not working as well as they should."

Susskind says that in carrying out this study, Hogan "builds on his long experience developing energy facilities in many parts of the world" and through his analysis "offers a detailed package of reforms that could make a difference."

Hogan said the research changed his own perspective. "I went in thinking I would reaffirm things I already believed," he says, but that turned out not to be the case. For example, he said, "I went in very negative about offshore wind in the near term," but the study "completely changed my mind."