The Most Powerful Workplace Motivator
When evaluating compensation issues,
economists often assume that both an employer and an employee make rational,
albeit self-interested choices while working toward a goal. The problem, says
Assistant Professor Ian Larkin, is that the most powerful workplace motivator
is our natural tendency to measure our own performance against the performance
of others. Key concepts include:
- The most powerful workplace motivator is our natural tendency to measure our own performance against the performance of others.
- Salespeople will actually give up the chance to make extra money if doing so will garner positive recognition from their peers.
- In the age of social networking, employees are more likely than ever to share salary information with each other. Employers need to keep this fact in mind when designing compensation plans.
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."
The
$30,000 gold star
The power of social comparison can
lead to irrational financial decisions, according to Larkin's 2009 paper
"Paying $30,000 for a Gold Star: An Empirical Investigation into the Value
of Peer Recognition to Software Salespeople."
The paper describes a field study at
a large enterprise software firm, where salespeople's salaries are largely
based on commissions. The firm also features another common sales incentive--a
"president's club" membership for those employees who sell more
software than 90 percent of their peers in a given year.
The software firm uses a
"commission accelerator" program over the course of each financial
quarter, meaning that a salesperson expecting a high-volume sale at the
beginning of a quarter would receive a higher commission on any additional
sales in the same quarter. A salesperson expecting a large sale early in the
first quarter of the year would rationally want to delay any other potential
sales until later in that quarter, so as to take advantage of the accelerating
commission schedule.
However, making the sale right away,
before the end of the year, could help the salesperson achieve special
recognition as a member of the club. Thus, the salesperson faces a choice:
delay the sale and garner eventual commission boosts, or make the sale right
away and improve the chance of attaining club membership. In the paper, Larkin
uses actual choices of hundreds of salespeople facing this decision to
statistically estimate the average salesperson's "willingness to pay"
for club induction—the point at which a salesperson is indifferent to waiting for greater commissions and closing the deal now
and getting inducted into the club. The willingness-to-pay statistic at the
software firm is calculated to be nearly $30,000, or approximately 5 percent of
take-home pay.
"My research shows that
salespeople who are right on the margin of club induction are actually willing
to pay to get over the margin and into the club," Larkin says.
Importantly, Larkin observed that
there were no apparent financial benefits to attaining club membership.
Recipients received a gold star on their name card, companywide recognition, an
e-mail from the CEO, and a weekend trip to a tropical destination with the
other club members. (Granted, the trip was worth several hundred dollars, but
was far less financially valuable than a large commission.)
Club members "were not more
likely to be promoted, leave for a better job, or make higher commissions in
the future," Larkin says. "It really was all about the recognition of
and comparison with their peers, and many of them were willing to pay for
it."
Insecurity
leads to dishonesty
Social comparison also can lead to
insecurity-driven cheating, as Larkin details in a 2009 paper co-written with
HBS colleague Benjamin Edelman, Demographics, Career Concerns or Social
Comparison: Who Games SSRN Download Counts? The paper addresses an issue near and dear to academics
worldwide: the relative popularity of working papers in the Social Science
Research Network (SSRN) repository.
The SSRN is a huge academic paper
repository, with more than 100,000 authors and 500,000 registered users who
have the opportunity to view or download every paper on the site. For each
paper, SSRN creates a web page that includes statistics on how many times the
paper has been downloaded and viewed. The SSRN site also publishes various
"top 10" lists in numerous fields, ranked according to how many times
the paper has been viewed, downloaded, or cited elsewhere on SSRN.
Some scholars paid a lot of
attention to the reported download counts of their papers; Larkin reports that
one prominent legal academic described the monitoring of his own paper's
download counts as "like crack for me."
Historically, SSRN allowed unlimited
downloads of papers, and most of those downloads were reflected in the reported
download count on each paper's web page. It became apparent that many authors
were gaming the download count system by repeatedly downloading their own
papers, so that others would see the high download count and assume that these
particular papers were very popular. SSRN maintains detailed historical records
of every paper download and is able to determine when papers appear to be
downloaded over and over by the same person.
"It's like having a convenience
store that's not manned, and everyone who comes in can either steal or pay, but
there's a video camera that nobody knows about, and it's tracking everyone's
every move," Larkin says. "For years, some academics got away with
inflating their own download count numbers, but we were able to see exactly who
was doing this, and in what circumstances."
In their research, Larkin and
Edelman teamed up with the SSRN and set out to determine the factors that would
make academics inflate the download counts of their own papers.
"As economists, we thought,
hmmm, it's probably people who are up for tenure soon, or maybe it's the people
who just graduated, and they want to get their name out there," Larkin
says. "We were thinking very much along the traditional economic
model--people doing things for rational, career-promoting reasons."
Larkin shared these hypotheses with
HBS colleague and mentor Max Bazerman, a leading ethics scholar, who had a
different theory. "Max told me, 'I'll bet people are doing this because
they feel bad that their papers aren't being downloaded as much as their
colleagues' papers,' " Larkin says. "So we looked at that."
It turned out Bazerman was right.
The researchers found that authors were more likely to download their own
papers repeatedly when a colleague's paper was performing especially well on
the site, or when a very similar paper to an author's was newly released and
received significant downloads. Deceptive downloads also increased during times
when a paper was close to gaining (or losing) placement on a top 10 list.
(Ironically, one of the most downloaded SSRN papers of all time is 'I've Got Nothing to Hide' and Other
Misunderstandings of Privacy.)
"Again, what was surprising to
us was how little we found in terms of the economic reasons for doing
this," Larkin says. "By far, the biggest predictor of this behavior
was fear of being socially inferior to one's peers."
(Those tempted to boost a paper's
usage stats should note that SSRN's terms of service now state that the
attempted manipulation of download counts is against site rules, and that the
organization retains the right to ban anyone caught abusing the system.)
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." 
Carmen Nobel is senior editor of HBS Working Knowledge.
http://hbswk.hbs.edu/item/6792.html
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