francescochLearning that a co-worker earns more than you can decrease your job performance while increasing the likelihood of you searching for a new job, according to a new research study.
On the other hand, learning what your manager makes can prompt you to work harder.
The results of the study were recently published in How Much Does Your Boss Make? The Effects of Salary Comparisons, co-written by Zoë B. Cullen, an assistant professor at Harvard Business School, and Ricardo Perez-Truglia, an assistant professor at UCLA’s Anderson School of Management.
The findings are significant for employers, underscoring how changing the salary of one worker can affect the behavior of other employees. “These externalities can have important implications for the provision of incentives within the firm and for pay transparency,” the authors write.
Cullen and Perez-Truglia conducted the field experiment with 2,060 workers at a large, multibillion dollar commercial bank with thousands of employees. The researchers examined a variety of information, including the number of emails sent and received over time and time-stamp data, to calculate the number of hours in the office on a daily basis, both of which helped signal how much effort individuals were putting into their job. They also studied compensation at all levels, including senior executives.
Workers were surveyed on how much they thought, on average, peers and managers were making, and on their own pay and job satisfaction. To make sure employees were being honest in their beliefs about others’ compensation, the researchers, working with the bank’s HR department, offered monetary rewards for employees who accurately guessed the average salaries of others. They found that less than a third were able to guess the answer within 5 percent of the truth, despite sizable rewards.
Unexpected results
The research results were sometimes counterintuitive, Cullen says. For example, employees worked harder after discovering how much their managers made. For every 1 percent higher in the perceived salary of a manager, employees clocked 0.15 percent more hours.
But the employees’ extra effort diminished as the difference in rank between employee and manager widened. In some cases, “We were looking at how employees responded to managers who were five promotions away and who they explicitly thought were in positions they themselves would never achieve,” Cullen says. In those cases, the work-harder reaction was much smaller but did not become negative.
When employees received salary information about managers who were closer to their own rank, they may have found the salary difference aspirational—just a promotion or two away, she says.
A different reaction
While knowledge of managerial compensation seemed to coax more effort out of workers, the exact opposite happened when employees learned what peers were making.
For every 1 percent higher salary a co-worker earned over the employee’s expectation, they worked 0.94 percent fewer hours, the researchers found.
In a global environment where companies are scrambling to find qualified workers to fill vacancies, another important finding emerged. When an employee learned a co-worker’s salary was 1 percent higher than estimated, chances rose by 0.225 percent that they’d leave the company.
The researchers made other discoveries as well, which might have something to say about wage inequality and widening pay gaps in corporations. The findings suggest:
- “Female employees may be able to tolerate being paid less than male employees as long as the male employees hold a different position,” the authors write. “This phenomenon may explain why the gender wage gap is large in the vertical [top-to-bottom] margin but small in the horizontal [peer-to-peer] margin.”
- Social forces may not be as effective as thought in moderating pay inequality within companies. “While this channel may force firms to reduce horizontal inequality, firms do not face resistance to increasing vertical inequality.”
- Transparency policies, such as disclosure of CEO pay, “may be less effective at curbing inequality than previously thought.”
Implications for employers
The researchers’ findings could convince some companies to rethink the equity of their own compensation plans and the level of salary transparency they wish to maintain.
For example, it may be more effective to structure pay raises based on promotion rather than on performance among peers. Employers could then provide incentives to work toward promotion rather than for salary increases under the same job title.
“Just having a title difference or responsibility difference is enough for people to think very differently about the [salary] comparison,” Cullen says.
Rachel Layne is a writer based in the Boston area.
Related Reading:
Should Companies Disclose Employee Compensation?
Working for a Shamed Company Can Hurt Your Future Compensation
Research Paper The Psychological Costs of Pay-for-Performance: Implications for Strategic Compensation
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