As the Marquis de Sade taught us long ago, penalties are far more motivating than rewards. Economists argue that we are more inclined to avoid actual loss than to strive for conditional benefits.
This tendency is called loss aversion. It has been measured for decades, but only recently have researchers begun studying its influence on workplace productivity.
In a study of 150 public-school teachers in Chicago Heights, Illinois, University of Chicago economist John List split the teachers into two groups and told both that their bonuses would be linked to student test scores. Teachers in the first would receive a bonus at the end of the year if student test scores improved. Members of the second group received a check for $4,000 in September and agreed to return the money if test scores failed to rise by June. Loss aversion worked: Teachers who faced the threat of having to refund their bonuses produced student test scores that were about 7 percentage points higher on average than the scores of students with teachers in the conventional bonus plan. [read]