On the psychology of bonuses: The effects of loss aversion and Yerkes-Dodson law on performance in cognitively and mechanically demanding tasks

Monetary bonus schemes are one of the most well-used forms of employee compensation in the modern business world. Yet, such schemes are primarily constructed as gains to incentivize an increase in work effort and performance. Using insights from behavioral economics, we construct a novel extrinsic compensation system modelled after Loss Aversion and the Yerkes-Dodson Law. We test this system using two experimental designs that measure performance based on cognitive- and mechanical efforts, respectively. In study 1 we find no difference in cognitive performance between 4 different bonus schemes. In a pre-registered study 2 we again find no difference in mechanical performance between 4 different conditions. Contrary to previous research, our findings suggest no significant effect of bonus schemes modelled after Loss Aversion and Yerkes-Dodson Law, whether administered alone or in combination. We discuss limitations and implications for compensation design and research.