“Predictably Irrational” author Dan Ariely asks: Do massive bonuses actually cause *poor* performance?:

Wall Street’s multimillion-dollar bonuses have long roused the populist ire. Bankers routinely defended their excessive pay saying it simply amounted to exceptional rewards for exceptional performance. The implication was that if you cut bonuses, you’d cut performance. My research suggests otherwise. Very large bonuses actually can cause job performance to deteriorate. Super-sized pay can take executive’s minds off their jobs and onto their bonuses.

And:

The results (of the study) defied conventional wisdom. The group offered the highest bonus did worse than the other two groups – in every single task. On top of that, the people offered medium bonuses performed no better or worse than those offered low bonuses.

And:

Financial rewards are a double-edged sword. They provide motivation to work well, but they also cause stress and preoccupation with the reward that can actually hurt performance. If our tests mimic the real world, then higher bonuses may hinder executives from working to the best of their ability.

Money isn’t the only thing that compels better (or worse) performance. We also conducted 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, either privately or in front of the others. We assumed their motivation to do well would be higher in public and improve their performance. In fact, they did worse.

So it turns out that social pressure has a similar effect to money – it too is a double-edged sword. It motivates people, especially in tasks that demand effort and no skill. But it can provide stress, too, and at some point that stress overwhelms the skill.