Monday, October 31, 2011

Motivation: The Power of Peer Comparison

Ian Larkin of Harvard Business School has conducted a very interesting field study to examine how comparison to one's peers motivates employees.  Larkin conducted a field study at a large enterprise software firm.  The company paid its sales people based on commission, naturally.   However, employees also could receive a nonmonetary recognition each year if they performed better than 90% of their peers.  They could be granted membership into the "President's Club."  The award did not come with extra monetary compensation.  Instead, employees received a gold star on their name card, company-wide recognition, an e-mail from the CEO, and a weekend trip to a tropical destination with the other club members.    Here is what Larkin found:

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.

What's the implication of this study?  Well, as we have known for some time, social comparison is a very powerful motivator.  People don't simply worry about what they earn. They care about what they earn relative to their peers.  Designing reward schemes with this in mind can result in a more highly motivated workplace.  Disregarding these findings can lead to disenchanted employees.   I recall Michael Lewis writing about this phenomenon in Liar's Poker.  Bankers would receive huge bonuses, but still be very upset, because they learned that others had received higher bonuses.  We might just chalk that up to "banker greed" - but of course, this study and others show that social comparison is a powerful factor across many organizations. 

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