How Irrational Labs Creates “Irrational” Bonuses

by Ingrid M. Paulin and Evelyn Gosnell

70% of U.S. employees are disengaged at work. When we think about how to fix this, most companies turn to financial incentives. Pay-for-performance year-end bonuses are pervasive. But do they work?

A meta-analysis of 51 studies says no. There are unintended side effects of bonuses: tying pay to performance can crowd out intrinsic motivation, increase unethical behavior, and reduce cooperation.

The other problem is that at most workplaces, bonuses are given at year-end without any conditions attached. It’s a check that the recipient can use however she pleases — rent, paying off a credit card, phone bill, etc. In other words, from a happiness standpoint, she doesn’t feel it; she doesn’t notice it. Or, let’s say she purchases something shortly after receiving the bonus. Will the happiness she derives from this object last throughout the year?

Taking these issues into consideration, at Irrational Labs, we came up with a different approach. Our whole team recently got a small sum to spend… but with a catch. We had to spend the money in a way that would:

  1. Increase our happiness, and
  2. Pay (happiness) dividends over time.

On top of that, we shared our ideas with each other, allowing us to connect and bond over them.

I recently told a friend of mine about this process, and she immediately said, “That is such a good idea. I’m going to suggest this to my boss.” Realizing that not all companies have as many behavioral science nerds as ours, I offered to write up some of the things we know about how we can increase the happiness we get from spending.

Here are seven research-backed ways to increase happiness:

1. Add novelty

Because of a concept called Hedonic Adaptation, the happiness we get from new things fades quickly. One way to counteract this is to break our routine and add more novelty into our lives. Don’t watch Netflix every Friday night — do something (or see something) you’ve never done before. Dueling pianos? Improv comedy? Pottery class? Acro-yoga? The options are almost endless.

2. Focus on meaning, not just pleasure

When we think of things that bring us happiness, we often think of hedonic pleasures: a relaxing massage, a delicious ice-cream sundae. Running a marathon or writing a book is not usually what comes to mind when we think of happiness. Activities that might be challenging in the moment can often give us a deeper sense of meaning that is more durable and more closely tied to how we think of ourselves.

3. Spend it on other people

To find out the details of what kind of spending makes people happier, Elizabeth Dunn, Mike Norton, and Lara Aknin gave participants in their study a mystery envelope. It contained either $5 or $20, and instructions to either spend it on themselves or someone else. They then called the participants and asked how they were feeling. Those who had spent the money on others were measurably happier than those who had spent it on themselves, and whether they were given $5 or $20 didn’t make a difference. So next time you want a happiness boost, think about how you can make the people around you happy rather than spending on yourself!

4. Favor experiences over things

A 2003 paper posing the question “To do or to have?” found that buying experiences improves our well-being more than buying material goods. When the researchers asked participants in the survey about their purchases, they found that experiences were seen as making them happier and a better investment, and that their moods were better when recalling them.

5. Better yet: Favor experiences that are shared with others

Sharing an experience can amplify it, fostering a sense of shared identity and belonging. Think of the impact of watching the recent eclipse in a large crowd. Beyond making us happy in the present, having a strong social network is correlated with more happiness and less loneliness in old age.

6. Spend on things that save you time

Most of us have daily chores we really don’t like doing: Maybe it’s cleaning, cooking or grocery shopping. A recent study found that if happiness is your goal when deciding how to spend your disposable income, outsourcing disliked tasks to free up your time is a good way to go. So if doing your own taxes is a task you dread, don’t feel guilty — go ahead and get someone to do them for you.

7. Break it down to many smaller treats, not one big splurge

Would you prefer one hour-long massage or two thirty-minute massages? Research by Leif Nelson and Tom Meyvis has found that even though we can get more annoyed by having to interrupt an experience, we also end up enjoying it twice as much. This extends beyond massages: several small treats make people happier than one big splurge. So rather than saving for a long vacation, perhaps you should consider several mini-breaks instead!

The moral of the story?

Regular bonuses often don’t work. But as choice architects, we can redesign the system to increase the chances that they will maximize happiness over time.