counter-productive: bonuses and the big lie

By in banking, general, management, strategy on Wednesday, 1 June 2011

Paying huge bonuses to retain top people in banks has long been controversial. Distasteful certainly – but maybe even counter-productive.
Karl Duncker shows us paying bonues for ideas doesn't work.
Let me tell you about a test Karl Duncker did just after the Thirties banking crash. You could be surprised. And even more angry with the banks…

Mr Duncker’s Candle Problem

Karl Duncker was a cognitive psychologist. He wanted to analyse the effects of financial incentives had on problem solving. So he came up with a simple test.

He took two separate groups of people and gave them a simple problem to solve. They had to fix a candle to a wall without it dripping wax.

The members of the two groups were each given a candle, a box of matches and some drawing pins. I’ll let you think about the solution for a moment…

A surprising result

OK – you’ve probably got the answer. You just empty the matches out of the box, pin it to the wall with the drawing pins and you have a handy candle holder.

But the key part of this rather mundane test was what he told one of the groups. Members of one group were each offered $20 to solve the problem.

Now remember these were austere times and back then, $20 was a lot of money. Logically, you’d assume that the people who stood to be rewarded would try harder and come up with the answer quicker.

You’d think the other group members would see it as just another job and maybe not make such an effort to solve what was someone else’s problem.

If you thought that, I have to say that you’d be wrong.

The group that stood to make the $20 actually took longer to solve the problem. They took around three and a half minutes longer on average than the group without the financial incentive.

So what can we learn from this little exercise?

Functional Fixation Syndrome

Duncker referred to what he had observed from this test as functional fixedness. You literally have to think “outside the box”.

Its all about changing our fixed perceptions – stopping seeing things as they are, then starting to think about what they can be.

The people here had to stop seeing a box of matches and see a candle holder. That goes a long way to explain why those overpaid banking high-flyers can’t see the wood for the trees and the more they’re paid, the less they actually produce.

Seeing problems as opportunities may seem a cliché, but that’s what defines us. Duncker’s candle test has a lot to teach our banks – and us today.

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