DP2014-20

An Experim ental Examination ofCompensation Schem es a nd L evel ofEffort in Differentiated Tasks
Hiromasa TAKAHASHI
Junyi SHEN
Kazuhito OGAWA
May 13, 2014

AN EXPERIMENTAL EXAMINATION OF COMPENSATION SCHEMES ANDLEVEL OF EFFORT IN DIFFERENTIATED TASKS
Hiromasa Takahashi *, Junyi Shen †, and Kazuhito Ogawa^*Faculty of International Studies, Hiroshima City University, Japan,†Research Institute for Economics and Business Administration, Kobe University,

Japan,and ^Faculty of Sociology, Kansai University, Japan
ABSTRACT
We examine the influence of different compensation schemes on exertion of effort
for differentiated tasks. The first type of task is assumed to be boring and has no
intrinsic motivation, while the second is assumed to be interesting, and has a higher
intrinsic motivation. The results are as follows: (1) in the first task, standard economic
theory, which claims higher pay should result in higher effort, does not hold. (2)Standard economic theory holds for the second task, which predicts that the higher the
incentive, the more effort one exerts, and achieves a higher performance on average.
Keywords: real effort experiment, intrinsic motivation, loss aversion, fixed pay,
incentive pay
JEL classification: M52, J33

I. INTRODUCTION
According to standard economic theory, the more monetary incentive is provided, themore effort one exerts, achieving a higher performance on average. That is, one exerts
more effort when higher performance is paid with higher compensation. Laboratory
experiments (Dickinson, 1999) and field experiments (Lazear, 2000; Banker et al.,1996) support this basic premise. Many topics, such as the principal agent theory, labor
economics, and human resource management, are studied by considering this premise asa given.
However, in the field of social psychology, it has been pointed out that the monetary
Corresponding author: Hiromasa Takahashi, Faculty of International Studies,
Hiroshima City University, 3-4-1 Ozuka-Higashi, Asa-Minami, Hiroshima 731-3194,
Japan. Tel:+ 81-82-8301525; E-mail: htaka@intl.hiroshima-cu.ac.jp.

incentive does not necessarily facilitate one's effort and that, instead, it undermines
efforts. The reason often cited for this behavior is the crowding out of intrinsic
motivation by monetary motivation (Deci, 1975; Frey and Jegen, 2001; Frey andOberholzer-Gee, 1997; Gneezy et al., 2011). The intrinsic motivation is the motivation
unrelated to extrinsic monetary motivation, such as the pleasure of performing theactivity, or the gratification achieved when one feels that s/he has helped others orsociety as a whole. Monetary incentive may undermine the intrinsic motivation. For
example, Fehr and Gächter (2002) and Gneezy and Rustichini (2000a) showed that themonetary incentives undermine pro-social behavior. 1
In the context of tasks, if the crowding out effect is greater than the effect ofpromotion of one's effort due to the monetary compensation provided, monetarycompensation undermines one's effort or degrades performance. Deci (1971) conducted
experiments consisting of three stages, and in all stages, participants worked on puzzles.
In the first and last stages, participants performed without pay and in the second stage,
they were paid according to their performance. Deci (1971) showed that participants
exerted greater effort in the second stage than in the first and third stages. Especially, theyexerted lesser effort in the third stage than in the first stage. This suggests that themonetary compensation undermined the intrinsic motivation in the third stage.

Gneezy and Rustichini (2000b) found a U-shaped relationship between effort andmagnitude of incentive, or performance-based, pay. That is, the participants with low
incentive compensation schemes performed worse in an IQ test than the participants inthe scheme with a high incentive. However, the participants with low incentive schemes
performed worse than the participants in the no payment scheme did. This result
suggests that low monetary incentives help to crowd out the intrinsic motivation.
Pokorny (2008) reported an inverse U-shaped relationship between effort andmagnitude of incentive pay. Level of effort increases in proportion to increase inmonetary incentives at low levels. However, the level of effort decreases with respect tomonetary incentives when it is higher than a certain level. This result contradicts theresults of Gneezy and Rustichini (2000b). Pokorny (2008) explained the result of thereference-dependent preference and loss-aversion (Kahneman and Tversky, 1979;
Tversky and Kahneman, 1991). 2
1

Lacetera and Macis (2010) and Mellström and Johannesson (2008) showed that the crowdingout effect is different between males and females. It is also reported that the monetary incentive
undermines pro-social behavior for reasons other than the crowding out effect. (Ariely et. al,2009; Fuster and Meier, 2010)
2 Fehr and Goette (2007), Camerer et al. (1997), Crawford and Meng (2011) and Farber (2008)
found that the higher wages reduced the effort or labor supply in their field experiments or fieldAccording to the Prospect Theory, people’s preference depends on not only theachieved consumption or income levels, but also on some reference level or reference
point (e.g., an average level, an expected level, or the level achieved in the preceding
period). People interpret a level lower than the reference point as a loss and extremely
dislike loss in the sense that decrease of utility when the achieved level is lower than thereference point by a given margin is larger than the increase in utility when the achieved
level is higher than the reference point by the same margin.
In the case of the economic experiments and its rewards, the expected reward before
the experiment starts may be a reference point for rewards. When show-up fee or
incentives pay is small, the reward that a participant will get is more likely to fall below
his reference point and this makes him work harder than when the show-up fee or
incentive pay is large enough because of the fear of loss-aversion. In fact, the show-up
fee in the experiment of Pokorny (2008) was much lower than that of Gneezy andRustichini (2000b).In this case, the participants with the low incentive in Pokorny(2008) anticipated the lower reward than reference point and worked harder because of
the fear of loss-aversion.
The relationship between effort and magnitude of incentives also depends on the levelof interest the performer has towards the task. For example, Pascual-Ezama et al. (2013)
found that those who have a high level of intrinsic motivation from the pleasure of
doing the task itself, responded better to monetary incentives than those having a low
level of intrinsic motivation towards the completion of the task.
Heyman and Ariely (2004) and Yam (2013) examined whether the relationshipbetween effort and the magnitude of compensation differs according to whether it isbased in the monetary market or the social market. 3 Heyman and Ariely (2004) foundthat the larger the compensation in the monetary market, the harder one works; however,effort is not sensitive to the magnitude of compensation in the social market.
Furthermore, they found that low payment in the monetary market decreases
performance as compared to performance in the social market with no payment. Notethat fixed pay is controlled in Heyman and Ariely (2004), in contrast to Gneezy andRustichini (2000b) and Pokorny (2008). 4 Their result showed that the standard
economic theory asserting that effort is not sensitive to the magnitude of fixed pay iswrong.
studies. These results are consistent with the loss-aversion.
3 In Heyman and Ariely (2004), they defined the case where monetary payments were used as amonetary market and the case where no monetary reward was involved or a gift reward wasused as a social market.
4
Squazzoni and Takács (2013) reported that fixed pay undermines the cooperative behavior.

In this paper, we conducted subjective experiments in which the participants engaged
in two types of real effort tasks with five different compensation schemes. One task
involves clicking on circles and the other is to solve a series of kanji puzzles. We
assume that the former task is boring, and has no intrinsic motivation derived fromworking on the task for its own sake, while the latter is interesting and has a large
intrinsic motivation. The five compensation schemes were no payment, low incentive
pay, high incentive pay, low fixed pay, and high fixed pay. From these experiments, we
examine the relationship between exertion of effort and the magnitude and nature ofcompensation received.
The contribution of the current paper to the existing literature is two-fold. First, since
compensation schemes applied in the previous studies were different (e.g., fixed pay in
Heyman and Ariely (2004) vs. incentive pay in Gneezy and Rustichini (2000) andPokorny (2008)), the results obtained from these studies were mixed. We apply both
fixed pay and incentive pay compensation schemes to provide a systematic investigationof the relationship between levels of effort exerted and monetary incentive. Second, in
our experiments, participants were asked to do both boring and interesting tasks. Thus,
the influence of content of tasks performed on the relationship between effort levels andcompensation schemes can also be examined. We believe that this experimental design
can provide a fresh insight into the related literature.
The remainder of the paper is organized as follows. Section II describes the issues
related to the experiment. The results of the experiment are presented in section III.
Finally, section IV discusses the results and suggests several possible directions for
future study.
II. EXPERIMENT DESIGN
We conducted five different treatments with different compensation schemes. Eachtreatment consisted of two tasks, clicking on circles and solving a series of kanji puzzles.
Note that the contents of these two tasks were the same among treatments. In eachtreatment, participants were informed on how to click the circles and the compensation
scheme for the task before performing the task. After completing the first task, they
were informed on how to work on the kanji puzzle and the attached compensation
scheme before being asked to solve the puzzles.
The procedure of the clicking circles task is as follows. After the task was started, acircle with a diameter of about 2 centimeters appeared in a random place on thecomputer screen. If a participant clicked inside the circle, s/he got one point and thecircle would disappear. Simultaneously, a new circle would appear in a random place on
the computer screen. If the participant clicked inside this circle, s/he got another point
and the game would thus continue. This was repeated until time ran out. The points s/hegot were indicated on the top of the computer screen. The task lasted 5 minutes andparticipants were encouraged to get as many points as they could. The clicking circles
task (see Figure 1) is similar to the task of counting numbers in Pokorny (2008) or thetask of dragging a digital ball in Heyman and Ariely (2004), in that they do not have any
intrinsic motivation with regards to pleasure derived from working on the task itself. We
measured the amount of effort exerted by the points obtained by the participant.
In the kanji puzzle task, participants were required to solve four kanji puzzles. Eachpuzzle was composed of the following; a solver makes three three-character idioms
using nine blank boxes and ten given kanji characters. The time limit for solving eachpuzzle was fifteen minutes and would end when the puzzle is solved, the allotted time islapsed, or when the solver clicks a give-up icon located at the bottom of the screen. The
first three puzzles were relatively easy while the final puzzle was extremely difficult.
The measure of effort was the length of time that participants spent in solving the final
puzzle. A kanji puzzle (see Figure 2) is similar to the puzzle in Heyman and Ariely(2004), in which participants derived pleasure from solving it for its own sake.
The five compensation schemes were no payment, low incentive pay, high incentive
pay, low fixed pay, and high fixed pay. In a no payment scheme, participants worked on
both tasks without any pay. In the low and high fixed pay treatments, participants were
paid 200 JPY 5 and 800 JPY, respectively, for the first task, and 300 JPY and 1200 JPY,
respectively, for participation in the kanji puzzle task. In low incentive and highincentive payment schemes, participants were paid 0.5 JPY and 2 JPY, respectively, forevery point scored in the first task and 100 JPY and 400 JPY, respectively, for every
correct answer in the Kanji puzzle. 6 Our experimental design is a “between participants
design” for the factor of compensation scheme and a “within participants design” for thefactor of real task.
Note that our "low incentive pay" is higher than the "very low incentive" of Gneezy
and Rustichini (2000b) and Pokorny (2008). This is because Kansai University, where
we conducted the experiment, requested us to ensure that the reward received byparticipants must not be lower than the minimum hourly wage. For the same reason, our"low fixed pay" is higher than the "low fixed pay" of Heyman and Ariely (2004).
5$1 was about 100 JPY when the experiment was conducted.
Note that we did not pay any show-up fees for participants in low incentive pay and highincentive pay treatments, unlike the experiments in Gneezy and Rustichini (2000b) and Pokorny(2008).

6

Furthermore, our "high fixed pay" and "high incentive pay" are both higher than thoseof previous studies.
All five treatments were conducted at Kansai University in July 2013. 34, 24, 31, 29,
and 27 undergraduate students participated in the no payment, low fixed pay, high fixedpay, low incentive pay, and high incentive pay treatments, respectively. Including
payment, each treatment lasted for about forty minutes. 7 Participants of the low
incentive pay and high incentive pay treatments earned, on average, 523 JPY and 1,992
JPY, respectively.
III. RESULTS
The descriptive statistics of points in the first task and time before giving up in thelast kanji puzzle in each treatment are provided in Tables 1 and 2, respectively. The
visual representation of these results is presented in Figures 3 – 6.
We will first discuss the results obtained in the first task under incentive pay
schemes. From Table 1, average points in the first task in no payment, low incentive,
and high incentive treatments were 413.7, 446.7, and 395.9, respectively. Figure 3
shows an inverse U-shape relationship between the points and the magnitude ofincentives, which suggests that in comparison with no payment, a high incentive
payment does not improve the level of effort exerted, although the low incentive pay
does improve performance.
The second column of Table 3 reports the regression results of the first task, with thedependent variable being the points secured in the task. The independent variables are
Low incentive (a dummy variable equals 1 if the subjects participated in the low
incentive pay treatment and 0 otherwise), High incentive (a dummy variable equals 1 if
the subjects participated in the high incentive pay treatment and 0 otherwise), Low fixedpay (a dummy variable equals 1 if the subjects participated in the low fixed pay
treatment and 0 otherwise), and High fixed pay (a dummy variable equals 1 if thesubjects participated in the high fixed pay treatment and 0 otherwise). As shown in thecolumn, the subjects in the low incentive treatment performed significantly better thanthose in the no payment treatment did, whereas the subjects in the high incentive
treatment did not perform significantly differently than those in the no payment
treatment.
7

To recruit participants, we used the online billboard of Kansai University, except for the no
payment treatment. In no payment treatment, participants were students attending a class onelementary research methods. We informed them that their performance in the experiment was
not related to their scores in the class.

Considering the second task under incentive pay schemes, we first confirm theabsence of bias in the participants' ability in solving kanji puzzles. The average accuracy
rate in the first three puzzles was 99% and the average time for solving these puzzles
was about thirty seconds. There were no significant differences in these averages among
the treatments. Only one participant solved the fourth puzzle. 8 These results indicate
the absence of bias in participants' ability in solving kanji puzzles.
From Table 2, the average length of time before giving up in the last kanji puzzle inno payment, low incentive, and high incentive treatments were 219.8, 413.4, and 724.9
seconds, respectively. As shown in Figure 4, it suggests that the higher the incentive, themore effort one exerts, which is consistent with the prediction of standard economic
theory.
The rightmost column of Table 3 reports the Tobit regression results of the kanji
puzzle. The dependent variable is the time before giving up in the last kanji puzzle. The
independent variables are the same as in the regression of the first task. As shown in thecolumn, the subjects with low and high incentive pay treatments spend significantly
more time on trying to solve the puzzle than those in the no payment treatment.
Furthermore, an F-test (p < 0.01) indicates that these coefficients are significantly
different. That is, the more incentive provided as compensation, the longer the subjects
work through the most difficult puzzle.
We found that there are different effects of incentivized pay between the two tasks.
This suggests that the more incentive pay is given, the more effort one exerts when one
engages in a task with high intrinsic motivation. Our result is consistent with that of
Pascual-Ezama et al. (2013).
We now turn our attention to the effect of fixed pay schemes on performance in thefirst task. From Table 1, average points in the first task in no payment, low fixed pay,
and high fixed pay treatments were 413.7, 428.0, and 390.8, respectively. As shown in
Figure 5, it seems that the relationship between the points and the magnitude of fixed
pay also follows an inverse U-shaped curve, as in the case of incentive-based
compensation. However, as indicated by the regression results in the second column ofTable 3, points obtained in the first task with low fixed pay treatment were notsignificantly different from those in the no payment treatment, while points obtained in
the high fixed pay treatment were significantly lower than those in both no payment andlow fixed pay treatments. This result is, on the one hand, consistent with the predictionof standard economic theory in that fixed pay does not influence the level of effort
exerted; however, on the other hand, it also suggests that a high fixed pay can lower
8

The participant who solved the final puzzle participated in a no pay treatment.

participants’ performances.
Examining the performance in the second task under fixed pay schemes, we cansee from Table 2 that the average length of time before giving up in the last kanji puzzle
in no payment, low fixed pay, and high fixed pay treatments were 219.8, 224.0, and194.4 seconds, respectively. As shown in Figure 6, it seems that there are almost no
differences in the average time spent among the three treatments. This is confirmed by
the Tobit regression results presented in the right most column of Table 3. As indicated,the coefficients of both Low fixed pay and High fixed pay are not significantly different,suggesting that the effort of solving the last kanji puzzle is not affected by themagnitude of fixed pay.
IV. CONCLUSION
In this paper, we examined the influence of difference in compensation schemes on
effort on two real effort tasks. The first task was assumed to be boring and thus have no
intrinsic motivation, with the second task being assumed to be interesting, and thus
providing intrinsic motivation.
Results regarding the relationship between effort and the magnitude of incentive pay
are as follows. (1) In the case of the first task, level of effort is higher in the low
incentive pay treatment than in the no payment treatment; however, levels of effort arelower in the high incentive pay than in the low incentive pay. In other words, therelationship between effort and magnitude of incentive pay is in the shape of an inverted
U. This result is consistent with the result of Pokorny (2008) rather than that of Gneezy
and Rustichini (2000b). Though our "low incentive pay" was larger than the "very low
incentive" of Pokorny (2008), there were no show-up fees in our treatment unlike theexperiment of Pokorny (2008). Therefore, the participants might think that the reward
they would get was more likely to fall below the reference point and this makes themwork harder because of loss-aversion. In contrast, (2) in the case of the kanji puzzle, thehigher the incentive pay, the more effort one exerts. This result is consistent withstandard economic theory. Results (1) and (2) suggest that one exerts effort for a task
without intrinsic motivation due to the fear of loss-aversion, whereas he does not do sofor a task with intrinsic motivation.
Results for the relationship between effort and magnitude of fixed pay are as follows.
(3) In the case of the first task, level of effort was lower in the high fixed pay than in theno payment and low fixed pay schemes. This result does not necessarily contradict theresult of Heyman and Ariely (2004) because our “low fixed pay” is larger than their

“low condition,” instead the result is a new finding because our “high fixed pay” ismuch larger than their “high condition.” We think the reason for this result is that thehigh fixed pay per se possibly signals to the participants the difficulty of the first task
(Benabou and Tirole, 2003). In other words, the participants perceived the task to bevery difficult when given a high fixed pay. Furthermore, the rewards do not increase
even if they perform better. Hence, they do not work as hard. The last result is (4) in thecase of the kanji puzzle, the difference in levels of effort among no payment, low fixedpay, and high fixed pay treatments were not observed. This result is consistent with thestandard economic theory.
Summing up the above results, we suggest that to maximize exertion of one’s effort
for a task without intrinsic motivation, we should pay a performance-related amount but
should not pay too much, while to maximize effort for a task with intrinsic motivation,
pay a performance-related amount as high as possible.
ACKNOWLEDGEMENTS
Financial support from the Japanese Ministry of Education, Culture, Sports, Science andTechnology through Grand-in-aid for Scientific Research (C) 25380234 is gratefully
acknowledged. All of the views expressed in this paper and any errors are the sole
responsibility of the authors.
APPENDIX: EXPERIMENTAL INSTRUCTIONS
A.1. For clicking the circles task in the high incentive treatment
Procedure of the experiment
We will conduct two experiments. First, we explain the procedure of the firstexperiment. Please read carefully and make sure you understand.
(1) Please click the start button at the center of the screen when the experimenter cues.
(2) Click on the inside of the circle appearing at random place on the screen.
(3) If you click the circle correctly, the score on the screen will rise.
(4) The time limit for this task is 300 seconds.
(5) Please click as many as you can in the allotted time limit.
PayoffYour payoff for this experiment is calculated as follows.

Scores ×

2JPY

A.2. For kanji puzzle solving task in the high incentive treatment
Procedure of the experiment(1) Please click the start button at the center of the screen when the experimenter cues.
(2) Nine blank boxes appear on the top of the screen and ten kanji characters appear at
the bottom of the screen.
(3) Please drag the kanji characters to the boxes to make three three-character idioms
using nine kanji characters from the given ten kanji characters.
(4) If you make three three-character idioms correctly, the next problem will start.
(5) Click the GIVE UP icon on the lower right hand side of the screen if you cannot
solve the problem and want to give up. Then the next problem will start.
(6) The next problem will also start if you cannot solve the puzzle within the time limit.
(7) The kanji characters return to the original position if you push the RESET button at
the lower right hand side of the screen.
(8) There are four problems in total.
(9) The time limit for each problem is 15 minutes and the time remaining is indicated on
the top of the screen.
PayoffYour payoff for this experiment is calculated as follows.
The number of correct answers ×

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Figure 1. An image of clicking circles task

Figure 2. An image of the kanji puzzle

460.0

446.7

440.0
420.0

413.7
395.9

400.0
380.0
360.0

No payment

Low incentive

High incentive

Figure3. Average points of clicking circles task (incentive compensation)

900.0
724.9
600.0
413.4
300.0

0.0

219.8

No payment

Low incentive

High incentive

Figure 4. Average time before giving up the last kanji puzzle (incentive compensation)

460.0
440.0
420.0

428.0
413.7

400.0

390.8

380.0
360.0

No payment

Low fixed pay

High fixed pay

Figure 5. Average points of clicking circles task (fixed pay)

900.0

600.0

300.0

0.0

219.8

224.0

194.4

No payment

Low fixed pay

High fixed pay

Figure 6. Average time before giving up the last kanji puzzle (fixed pay)

Table 1. Descriptive statistics of points of clicking circles

Condition

MeanStandard deviation

Max

Min

N

No payment

413.7

48.6

480

295

34

Low incentive pay

446.7

50.1

525

287

29

High incentive pay

395.9

26.9

452

346

27

Low fixed pay

428.0

40.9

476

271

24

High fixed pay

390.8

37.2

451

312

30

Table 2. Descriptive statistics of time length before giving up the last kanji puzzle

Condition

MeanStandard deviation

Max

Min

N

No payment

219.8

204.3

879

20

33

Low incentive pay

413.4

341.5

900

23

29

High incentive pay

724.9

267.0

900

105

26

Low fixed pay

224.0

179.6

770

23

23

High fixed pay

194.4

152.3

767

12

31

Table 3. Regression results

Constant
Low incentive
High incentive
Low fixed pay
High fixed pay

Click circles

Kanji puzzle

413.677**

219.758**(8.360)(35.153)

33.013**211.925**(12.515)(78.005)-17.825614.102**(9.831)(85.773)

14.3244.286(11.788)(50.864)-22.876*-25.338(10.775)(44.329)

Notes: The regression of kanji puzzle is a Tobit regression whose censoring points are 0 and 900. Robust standard
errors are in parentheses. *p < 0.05, **p < 0.01.