In February, New York State Comptroller Thomas DiNapoli reported that Wall Street bonuses paid to New York City securities industry employees rose an estimated 17% to $20.3 billion in 2009.  And bonus pools at Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), and JPMorgan Chase (NYSE: JPM) increased by 31% in 2009.  Big bonuses and big compensation continue to be a big part of the Wall Street culture.  But is money an effective motivator? 

Dan Ariely is a professor of psychology and behavioral economics at Duke University and the best-selling author of The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home.  On a recent Motley Fool Money Radio Show, we talked with him about Wall Street bonuses, motivation, and Kobe Bryant’s performance in the clutch.

Below are some excerpts from our interview.

The problem with bonuses
Dan Ariely: The results that we have show that when you have very, very high bonuses, people actually try to perform well but they get overstressed and therefore perform quite mediocrely … Imagine you were going into a brain surgery and you wanted to really motivate your surgeon. What would you tell them?  Would you say, “Hey, if you do this well I’ll buy you a boat and if you don’t do this well, I’ll sue you”?  And now imagine that 50% of the time when they operate on you they think about the boat and [the other 50%] they think about being sued. Is this really what you want? … So you can ask yourself, are people purely motivated by money? And in reality, I think that's not the case, or it doesn't have to be the case. Think about yourself. Think about how much you get paid, what really motivates you, what gets you excited. It's not just about salary. We have this simplistic view that people are just motivated about salary. That people would much rather lay in the beach drinking mojitos, and the only reason they work is so they can get enough money to sit on the beach. But in reality that's not the case. People have really complex, multiple objectives. We want to find meaning in life, be helpful, and we want to see ourselves succeeding, and we care about our ego.  When we pay people tremendous bonuses, we think they will work better. In fact, big bonuses really work very well for physical tasks.  But they backfire for cognitive tasks.

If a behavioral economist were CEO of a Wall Street bank
Ariely: I used to think of banks as places for greedy people, and I wanted the greediest banker to work for me.  But now I think about banks differently. I actually think about their social value. I realized all of a sudden how important banks are and then when they don't function, society can't function very well. It was a very painful lesson, but it's very important. So if I was a CEO of a bank, I would not hire many people who have been working in banking for a long time. These people have been getting used to very high salaries for too long, and if you're going to pay them a modest salary they would think it offensive. So I would cut them out. And I would start a bank that was about transparency and trust, and had a simple compensation system. And I will not put such an emphasis on bonuses. We know that bonuses don't work that well. They're actually very counter-productive, and I would offer people a reasonable and good salary. There's no reason not to do that.

Buy, sell, or hold: The idea that Kobe Bryant is clutch
Ariely: So it turns out that Kobe Bryant is first of all not the most clutch player in the league, he’s maybe number 10 or 11. But even more than that, it says that clutch players in general are not as clutch as we think they are. When we look at how clutch players play in the last five minutes of the game, compared to the last five minutes of the first half, it turns out that they do shoot more points but it’s not because they get better, it’s because they try more frequently. And the same thing goes for the foul line. When they get to the foul line more frequently, they try more often, they get more points, but the percentage average doesn’t increase. So it turns out that clutchness is one of those illusions that people believe in. But it’s a self-fulfilling illusion, because if you and I play together and I believe you’re the clutch player, I give you the ball more. You believe you’re the clutch player, you try more. You’re not succeeding more percentage-wise, but you try more and you get more points. So it’s a self-fulfilling prophecy. But I wouldn’t put too much money on clutchness.

Catch our interview with Ariely and catch the radio show online at

Mac Greer doesn’t own any of the stocks discussed. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.