The NY Times has another piece on Wall Street bonuses (On Wall Street, Bonuses, Not Profits, Were Real) which is commented on at Dealbreaker (Opening Bell: 12.18.08). Supposedly bonuses induce risky behavior, or something like that.
My favorite study on this phenomenon is presented here (Year-End Bonus Is An Incentive To Cheat). In summary, some researchers at the Washington University in St. Louis performed a test in which the participants were paid to solve anagrams. Some students received a “flat salary”, some received a “performance based bonus”, and a third group was “penalized based on low performance”. In all compensation schemes the expected value of the compensation was equal. After completing these puzzles, the students then graded their own work and the researchers measured the level of dishonesty among the participants.
As you expect, participants who received a flat salary were the most honest and participants who received a performance bonus cheated when reporting the results.
The unexpected results however:
Participants who were penalized based on low performance not only cheated but also stole the nice pens that were to be returned at the end of the study!