29 Oct 2013  Research & Ideas

Do Employees Work Harder for Higher Pay?

In a recent field study, Duncan Gilchrist, Michael Luca, and Deepak Malhotra set out to answer a basic question: "Do employees work harder when they are paid more?"

 

In a famous scene from the film "Jerry Maguire," NFL wide receiver Rod Tidwell repeatedly screams, "Show me the money!" as his agent listens on the other end of the telephone. Intuition might tell us that showing the money motivates, and that increasing an employee's salary should correspondingly boost his or her motivation. It does—under certain conditions. The evolving field of behavioral economics is challenging the assumption that more money inevitably leads to increased effort.

In a recent field study that he conducted along with Harvard colleagues Duncan Gilchrist and Michael Luca, Harvard Business School Professor Deepak Malhotra set out to answer a basic question: "Do employees work harder when they are paid more?" As Malhotra, the Eli Goldston Professor of Business Administration, said in an interview, "Previous research has shown that paying people more than they expect may elicit reciprocity in the form of greater effort or productivity." Malhotra and his research team, however, found that paying more only led to greater productivity when the additional pay was presented as a gift, with no strings attached.

In the field study with 266 workers, three groups were hired to do a one-time, four-hour data entry task via the Internet labor market oDesk.com, which allows for online recruitment of freelancers from around the world.

"Keep in mind," Malhotra said, that "all of these people previously made less than $3 per hour where they live." Employees in one group did not know of the existence of the other groups. One group was given a lower starting pay rate ($3 per hour) and another a higher one ($4 per hour). Evaluating the work effort and performance of the low-pay versus the high-pay group, Malhotra said that "employees who were promised $4 worked no harder than those who were promised $3." Higher pay didn't lead to statistically better performance.

"Think carefully not just about what to pay employees, but also how to pay them"

"When someone is paid $4," said Malhotra of the findings, "even though it is more than they are used to making or expecting, there may be no reason for them to interpret this as a gift or concession from the employer. More likely, they just assume that their expectations were wrong, and $4 is 'the going rate' for this type of work." So paying more elicited about the same employee effort as the lesser rate.

The third group brought the most provocative results. Its members were initially offered $3 per hour, but then received a surprise $1 increase to match the higher-pay group. The pay increase was not related to performance. It was offered immediately after employees had agreed to work for $3 because, they were told, "we have a bigger budget than expected." So the additional dollar was perceived as a gift, Malhotra said.

"Those who were promised $3 but then later were given an additional $1 worked significantly harder than the other two groups," he said. "We attribute this to the salience of the gift: It was obvious to them that we didn't have to give this additional compensation, but that we had chosen to." The gift "signaled that we had done something nice for them which they may want to reciprocate." And they did reciprocate, with higher productivity.

Indeed, the "gift" group of workers performed with "roughly 20 percent higher productivity than both" the other groups, the study said. And for some employees who had more experience, the boost in productivity was much higher. Moreover, the gift group maintained better focus throughout the work, and performed especially well late into the assigned task.

What do these findings, which Malhotra described as "$3 + $1 is more than $4," mean for real-world companies? He suggested that companies should "think carefully not just about what to pay employees, but also how to pay them. The same amount of compensation can be structured in ways that will be more or less appreciated and reciprocated."

Malhotra also believes that companies need to consider what other factors motivate employees. "There is a lot of work that shows non-monetary incentives (e.g., recognition, respect, autonomy, etc.) can be powerful motivators of behaviors in the workplace," he said. "The key is to understand you are dealing with human beings who work hard not simply because of financial incentives, but because of a whole host of other factors."

About the author

Chuck Leddy writes for the Harvard Gazette, where this article first appeared.

Comments

    • David Deane-Spread
    • CEO, Metattude

    Is it not the case that all this continuing research into what engages then motivates people to perform well and give extra discretionary effort just more confirmation of what Herzberg's Dual Theory states?

    We see more research saying the same things, yet large enterprises - possibly the biggest influencers - leading by example - still incentivise in ways that don't deliver results.

    There are key distinctions between research findings, education and embodiment. What are we doing about that?

     
     
     
    • Biju
    • General Manager, Freudenberg

    This is an interesting topic with lot of research done . The effects of the same have been subjective depending on the individual goals. The general trend is that incentives beyond the standard package generally motivates individuals to perform better since a temporary (carrot) target realigns their thoughts and motivates them to perform better. The trick for the employer remains in making it attractive for the targeted group.

     
     
     
    • James Cameron
    • Information Analyst, ASIC

    Unfortunately, too many employers interpret statements such as, "The key is to understand you are dealing with human beings who work hard not simply because of financial incentives, but because of a whole host of other factors," to mean, "People will work hard for low pay if you include some low-cost non-monetary incentives." The two statements are not synonomous.

    My observations over 5 decades is that there is a certain critical range, which varies according to job type, culture, current economic conditions and the age and years of experience of the emplyee, within which employees expect to be paid. If you pay below this range, productivity declines. Such employees may be motivated to additional productivity if monetary incentives are also available. If you pay above this range, productivity does not necessarily increase. These employees may be additionally motivated by certain non-monetary incentives, but only if the employee places a personal value on what is offered, (eg single persons, with no partner and no children, may not place a much value on parental leave).

    Regardless of what is offered by the employer, there comes a point where no additional incentive will produce a long-term increase in productivity. Additional incentives may produce a short-tem improvement, but producivity will soon return to normal levels. For this reason, such short-term incentives are best targeted to one or two times during the year when higher producivity is especially required.

     
     
     
    • Kern Lewis
    • President, GrowthFocus, Inc.

    The cultural circumstances of the gift probably played a role, too. If the worker works in an environment where unexpected extra money (budget windfall) would have been retained by higher-up people, the fact that it was actually shared with frontline workers could have driven the big bump in productivity. Put it this way: If an American CEO receives a huge bonus in a given year thanks to stock options maturing, what would the impact be if he or she took 20% of that extra pay and distributed it as "thank you" bonuses to every employee for doing the work that got the CEO the bonus? The amount per employee would be small, but the gesture would have a big impact on engagement, and productivity, for the next quarter.

     
     
     
    • Frank W Sweeney
    • Principal, Frank W Sweeney & Associates

    A timely update and a reminder to review Frederick Herzberg's findings (Frederick Herzberg et al. The Motivation to Work, Wiley & Sons, New York, 1959). Thank you

     
     
     
    • Romuald Kepa
    • Executive coach, Self-employed

    This is sad that almost 60 years after Herzberg's study there are people who discover that recognition (e.g. "money with no strings attached") motivates, and salary is not.

     
     
     
    • Robin Goldsmith
    • President, Go Pro Management, Inc.

    From Herzberg on, lots of studies indicate money per se is a hygiene factor but not a motivator. The current study's results certainly could be interpreted as the 'gift' aspect rather than the money itself being the motivator.

    It would be more informative to see some studies with salaried professionals whose pay (with a few more zeroes--to make it interesting as they say) truly is not linked directly to either work effort or outcomes.

     
     
     
    • Cindy

    Interesting look at the impact on performance. Made me wonder how higher pay may impact retention or turnover.

     
     
     
    • Steven Essick
    • SVP Finance, Henkel

    It would be interesting to see output comparison of the "gift approach" vs approach where employees were informed up front that their pay of $3 could be increased up to $4 if they reached a certain output level. Even further, what would the output be if compensation were open-ended based on total output?

     
     
     
    • Susan White
    • HR Manager, AllAssignmentHelp.com

    I disagree with the picture drawn from the third group, they did not work hard because they got 1USD as a gift and payback that favor . But they worked hard because they knew you have huge budget and in the starting only they got 1 USD increment without doing anything. If they work hard and show their skills, they would be getting more money or atleast they can ask for more.

     
     
     
    • Taimur Khan
    • HR Consultant, Recently retired from a Herbal Medicine Company.

    I do agree. Based on my experience of having worked for nearly half a century, in the Army and later in the corporate sector, a fair wage is what is the expectation of workers as well as executives at all levels. Higher wage, above the market index hurts no one, but awarded without a reason does not lead to motivation resulting in higher productivity. A gift also has to be linked with performance and in our system is referred to as an incentive or bonus. But in my reckoning, the biggest productivity multiplier is the work environment and professional leadership coupled with an empathetic relationship established by the supervisor with her subordinates. There is no element greater than the human element that helps enhance productivity!!

     
     
     
    • Piscolabe

    Good argument against raising minimum wage and entitlements. Look at motivation of employees in countries with absurdly high minimum wages and entitlements.

     
     
     
    • Murray Willmott
    • HR Consultant, Freelance, Australia

    The "$3+$1" result is interesting and new information for me. The rest has been evident from studies in Human Behaviour for some time now. The unanswered question is for how long this higher level of motivation remains active. The accepted wisdom is that after a period of time, the $4, no matter how it is packaged, becomes the norm and is likely to no longer be an incentive.

    Short answer? Money is a short term incentive and works well as an attractor to someone considering a move to a new company. Longer time motivation is borne of motivation through interesting work and a clear understanding of how the work fits and contributes to the broader goals of the business.

     
     
     
    • Peter Lee
    • Mg Consultant, Remuneration Data Specialists Pte Ltd

    Interesting finding but not surprising.

    As long as the initial wage is not perceived to be unfair, any increase in wage that can be perceived as a gift i.e. not deserved, will be reciprocated either in increased productivity or compliance etc. Past research and findings have told us that but the issues are really quite complicated .

    What is important is the "context " or environment & whether it is neutral, positive or negative. If the context is negative all "gifts' may be viewed with suspicion & the reciprocating response may well be equally negative. E.G. if when the $1 is given, some people will say that they were probably underpaid in the first place.

    More specific research to account for various contextual conditions is needed to pin-point the actual "motivating" factors involved.

     
     
     
    • Habib Gul
    • research scholar, Mohammad ali jinnah university Islamabad

    I think it will be not true to say that only high level of pay cause good performance. if this is true why people are volunteer, why they exhibit extra role behaviour or OCB. up to a certain level where maximum payment stop working. where intrinsic and extrinsic award matter depend upon the situation.

     
     
     
    • Ms.Nadia
    • Student, Virtual University Pakistan

    The concept of $3+$1 is short term approach.Gift will no longer be taken as motivational tool when it will become a routine practice.People have to be motivated with non monetary benefits like prestige and respect.

     
     
     
    • Nick Boulter
    • Hay Group

    Interesting piece of research. I am not sure that it proves anything either way: for example, this was a one-off exercise. What would happen if the same method of 3+1 was applied each week or month to the same group? they would soon get to realise that 3+1 = 4: i.e. it's a fixed bonus. To be useful in application to work, there needs to be regular repeats: after all, that is what happens in work.