Abstract
Companies invest considerable resources to improve employee mood under the assumption that positive mood leads to improved creativity. However, theory suggests such investments may be in vain when the company uses performance dependent incentives. In a rebus puzzle creation task, we examine the effect of mood on creativity with compensation that is either fixed or based on the quantity or creativity of output. Positive mood leads to more highly creative output (i.e., puzzles that receive top-quartile creativity ratings) for fixed compensation, but not for quantity-dependent or creativity-dependent compensation. These results are consistent with performance-dependent compensation crowding out the effect of positive mood on creativity. Supplemental analysis indicates that this crowding out occurs over time rather than instantaneously. Further, the combination of negative mood and quantity incentives leads to the production of a larger number of puzzles that are of lowest creative quality (i.e., puzzles that receive bottom-quartile creativity ratings).
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