The Motivating (and Demotivating) Effects of Learning Others’ Salaries
OCTOBER 25, 2018
To our surprise, finding out that their managers got paid more seemed to make employees work harder than those who did not find out the true salary. Our estimates suggest that discovering that the boss’s salary is 10% higher than originally thought causes employees to spend 1.5% more hours in the office, send 1.3% more emails, and sell 1.1% more. (The higher the surprise, the larger the effect — finding out the boss earned 50% more led to effects five times larger.)
The evidence suggests that these effects were driven by aspirations.
While employees seemed perfectly capable of handling this vertical inequality, they did not handle horizontal inequality nearly as well.
We saw that finding out peers get paid more does have a negative effect on the employee’s effort and performance. Finding out that peers earn on average 10% more than initially thought caused employees to spend 9.4% fewer hours in the office, send 4.3% fewer emails, and sell 7.3% less.
This evidence suggests that it might not be wise to motivate individual employees through raises alone. If you increase the pay of one employee, that employee may work harder but the rest of the peer group could work less hard. You can avoid this by motivating employees through the prospect of a higher salary attached to a promotion. In other words, keep salaries compressed among employees in the same position, but offer them large raises when they get promoted to a higher position.
Our research raises the question: should you increase pay transparency at your company? Though surveys reveal most employees wish their employers were more transparent about salaries, the majority of firms maintain pay secrecy policies. But there is little evidence on how transparency affects the outcomes that managers care about. It is possible that managers choose pay secrecy because they think it is in their best interest when in fact it is not.
Of course, we must remember that salary information is sensitive, and thus there can be such a thing as too much transparency. For example, the majority of employees participating in our study were in favor of increasing transparency in an anonymous fashion, by reporting average salaries by position.