Any parent can tell you that a surefire way to turn joy into rage is to offer your child a big candy bar—and then turn around and offer an even bigger one to his sister. Suddenly, a special treat turns into a great injustice. “Hey! How come she got more? That’s not fair!”
And any hiring manager can tell you that the world of business is not so different.
“It really was all about the recognition of and comparison with their peers, and many of them were willing to pay for it.”
“This is why MBA programs send out lists of average salaries, and why students spend hours poring over those lists,” says Ian Larkin, an assistant professor in the Negotiation, Organizations & Markets Unit at Harvard Business School. “You should see the angry e-mails I get from students when they find out that a job offer turns out to be $10,000 per year below the average. It’s not that they really feel like an annual salary offer of $115,000 is unfair on its own. They might be perfectly happy with that salary if it weren’t for the information that it’s below average.”
And it’s not just a matter of money. In several studies of social comparison in the workplace, Larkin has found that the most powerful workplace motivator is our natural tendency to measure our own performance against the performance of others.
“Traditionally, [the field of] economics has held a very rational view of people, and there’s a gigantic amount of literature focusing on financial incentives and the idea that simply having financial incentives causes people to work harder,” he says. “But my research suggests that in deciding how hard we work and how well we think we’re performing, social comparisons matter just as much.”
Ramifications for salary managers
The field evidence from the worlds of software sales and academia indicates that companies need to bear social comparison in mind when designing compensation plans. Larkin discusses the issue in The Psychological Costs of Pay-for-Performance: Implications for the Strategic Compensation of Employees, a paper he cowrote with HBS colleague Francesca Gino and Washington University’s Lamar Pierce.
The authors argue that paying each employee solely according to his or her performance is actually an inefficient strategy; it can lead to resentment or even sabotage on the part of employees who believe they are underpaid compared with their colleagues. Thus, a standardized salary scale, combined with ancillary incentive programs, may be the best way to motivate employees. “When deciding how much effort to exude, workers not only respond to their own compensation, but also respond to pay relative to their peers as they socially compare,” the paper states.
That’s important food for thought, considering that Facebook, LinkedIn, and other such sites have made it de rigueur to share information that we used to keep to ourselves.
“It used to be that our salaries were very secret, but they’re getting less and less secret because of social networking,” Larkin says. “And people get upset quickly when they realize that there are large variances in how much other people are paid. Companies need to realize that with the overflow of information these days, paying peers differently is going to affect not only how those people feel but how their colleagues feel as well.”