Hiring and Collaborating with Higher-Paid Employees

Source: Berkeley Economic Review

What happens when we know that others are paid more than us?  Does it affect our willingness to collaborate with them?  What about hiring decisions? Are we more or less likely to hire someone who may earn more than us?  Cornell Professors Kevin Kniffin and Angus Hildreth examined this question in a series of experimental studies.  They found an interesting, but not surprising, dichotomy when it came to collaboration vs. hiring.

First, the scholars discovered that, "People chose to collaborate with higher- rather than lower-paid peers unless explicitly told that their potential collaborators’ knowledge, skills, abilities, and experience were similar, suggesting that pay was viewed as a signal for competence."  On the other hand, they found that, "People were less likely to hire a candidate with a higher (versus lower) pay history for a subordinate position on their team."  

This study has some very interesting practical implications with regard to the pay transparency movement.   The collaboration finding seems quite positive, though one has to wonder whether it is appropriate for workers to always use pay as a sign of competence.  In some organizations, we know that compensation and position is not at all a sign of strong capabilities!   The hiring dynamic is perhaps more problematic.  We would hope that people would hire the best talent, and that they would not feel threatened by someone who had excellent capabilities warranting high compensation.  Naturally, though, people's emotions are affected by compensation differences.  If it means that we don't hire the best people, then that would be very worrisome. 

Are You Willing to Pay More for Products Someone Loved Creating?

Writing for Kellogg Insight, Dylan Walsh reports this month on some fascinating new research by Jake Teeny, Anna Paley, Robert Smith, and Daniel Zane. Teeny and his colleagues examined the relationship between willingness-to-pay and the level of enjoyment a seller derives from creating a product. Walsh summarizes the findings:

As a whole, the studies showed that buyers actually associated production enjoyment with greater product quality and value, consequently increasing how much they were willing to pay for it. And yet sellers often charged less for the products and services that they enjoy providing, even though they also believed them to be of higher quality.

The scholars argue that potential buyers seem willing to pay more for products when they believe that sellers have experienced high levels of intrinsic motivation while creating the products.  In other words, if the seller valued the process of creating the product as much, if not more, than the good itself, then buyers seem willing to pay a higher price for the product.  On the other hand, they argue that sellers price the product with their own enjoyment in mind.  If you are performing an unenjoyable task, you might charge more for a particular service.  If you are doing something very enjoyable, you may perceive some of your "compensation" has come in the form of that satisfaction and pride.  As a result, you may not expect as high of a price for the product from the buyers.  

What does this mean for sellers?  Think carefully about showing your customer how much effort and passion has gone into the creation of a good or service.  You might just command a higher price as a result.  And sellers... not shortchange yourself when placing a value on something you loved creating. 

Does this research have lessons for employees in larger organizations? Perhaps it does.  Do we demand less monetary compensation if we truly love our job?  Are we shortchanging ourselves in these situations?  

Does Pay Transparency Help or Hurt Workers?

Source: TechTarget

Conventional wisdom seems to suggest that increased transparency about compensation will help workers. For instance, a CNBC story about New York's new salary transparency law is titled, "How NYC’s pay transparency law could help millions across the U.S. earn more money." Naturally, researchers have not taken the conventional wisdom as a given. They have begun exploring the actual impact on employees. Some early research suggests that the impact might not be as positive as some transparency advocates believe.

The UCLA Anderson Review recently published a feature article titled, "Pay Transparency: Will It Help or Hurt Workers?" The article focused on the work of Harvard Business School Professor Zoe Cullen and Brown University Professor Bobak Pakzad-Hurson.  These scholars found that employers with non-unionized workforces might capitalize on the newly available data about salaries across a wide range of firms to drive a very hard bargain with job candidates.  As a result, the transparency laws might depress starting wages.  Here is an excerpt from the article: 

Cullen and Pakzad-Hurson analyzed all job postings, worker bids and other transactions from 2010 to 2014 on the TaskRabbit platform, where employers hire temporary workers for lower-skilled jobs. Online labor markets employ perhaps 7 percent of the U.S. workforce, or 14 million people. The short-term, constantly renegotiated nature of the gigs offers an accelerated look at how transparency works its way through a market. The findings aren’t necessarily applicable to traditional labor markets, but are certainly worth considering in the transparency debate.

The model, in addition to suggesting fierce negotiating by companies pre-employment, indicates workers looking to be hired would not be so tough. Knowing wages are transparent within the company, a worker would want to get hired and then, upon learning what others make, negotiate a raise. The combination of those factors depressed wages, Cullen and Pakzad-Hurson report.

“Our analysis of equilibrium wages, hiring rate and profits under greater pay transparency reveals consequences that are counterintuitive and economically large in a market for low-skill tasks,” Cullen and Pakzad-Hurson write.

More research clearly must be done, and this paper's conclusions from analysis of the TaskRabbit platform might not apply to the broader labor market.  Still, the study suggests that more attention must be paid to the actual impact of these new transparency laws, rather than simply assuming that they will benefit employees.  

United Airlines Reverses Bonus Policy Decision

Well, that didn't take long.  After a firestorm of criticism, United Airlines has walked back their compensation policy change.   They will not be moving to the lottery system that they had proposed to replace regular quarterly performance bonuses for employees.   United President Scott Kirby issued a new memo to all employees.   Here is an excerpt:

"Since announcing our planned changes to the quarterly operations incentive program, we have listened carefully to the feedback and concerns you've expressed," Kirby wrote. " Our intention was to introduce a better, more exciting program, but we misjudged how these changes would be received by many of you. So, we are pressing the pause button on these changes to review your feedback and consider the right way to move ahead. We will be reaching out to work groups across the company, and the changes we make will better reflect your feedback."

I'm certainly glad that Kirby has reconsidered his decision.   Hopefully, Kirby and his team have learned that they would not have "misjudged" the employee reaction if they had simply sought feedback BEFORE issuing this policy announcement.  If senior executives wanted to change the compensation program, why not consult with people on the front lines more extensively PRIOR to making the shift?   The lack of an effort to solicit broad input is rather stunning.   The biggest management failure here is not "misjudging" employee reactions.  The colossal mistake is the highly flawed decision-making process.  The Board of Directors ought to be asking penetrating questions about that process more generally, rather than only focusing on this particular policy.   

United Airlines Eliminates Bonuses, Angers Employees

News reports this morning indicate that United Airlines has announced a significant change to its employee compensation policies.  The company has eliminated quarterly employee bonuses amounting to roughly $1,200 per year.   Instead, employees will be entered into a lottery in which a few lucky winners will receive cash payouts.  Others will not receive anything.  Only those with perfect attendance will be eligible for the lottery-type payouts.  United  Airlines President Scott Kirby issued a memo to employees explaining the change. Inc. magazine reports on several quotes from the memo:

“As we look to continue improving, we took a step back and decided to replace the quarterly operational bonus and perfect attendance programs with an exciting new rewards program called ‘core4 Score Rewards.'" 

"The reason for this change goes to the heart of our strategy: offering meaningful rewards will build excitement and a sense of accomplishment with more bang for the buck." 

"We want every United team member to picture themselves walking home with a grand prize, or driving home in a beautiful car that announces for all to see that you are committed to your success and ours."

Multiple reports indicate that employees are not pleased, to say the least. "The Points Guy" online travel site obtained a number of employee comments posted over the weekend on tthe airline’s “Flying Together” internal forum (in total, the Points Guy reports that more than 1,700 comments were posted on this forum). Here's one comment:

I find it unbelievable that management is so out of touch with their work force. To tout this announcement as something that workers would be excited about and appreciate just shows how elitist they are. This program is totally contradictory to the CORE4 “we are listening, we are one” philosophy!

Bill Murphy at Inc.com also reported on some of these employee comments.   According to his article, employees offered comments such as:

"It occurred to me and my wife that this is terribly unfair to single parents. ... Imagine your child coming home sick from school, no fault of your own. You are faced with calling in sick thus losing your 'chance' at a bonus or leaving your child/children home alone to care for themselves. What a terrible situation United has put that person in." --First Officer - B-767/B-757

"I can't imagine driving the Mercedes into the employee lot while everyone around me that worked just as hard, or harder got nothing. I would feel like such a jerk. It's quite telling about the people who thought this up. I bet they would be gloating happily if they won." --Flight Attendant - Domestic

I'm fascinated to see how United responds to this furor that has emerged in news reports, social media, their internal forum, and in the form of a Change.org petition.  It certainly sounds as though they did not seek widespread input from front-line employees before making this change, and they did not test the messaging sufficiently before sending out this memo.   What a mess they have created!  As the old adage goes, it takes years to build trust within your organization, and it only takes one big mistake to destroy that trust.  

What's the Best Incentive Compensation Strategy for Salespeople?

Harvard Business School Professors Doug Chung and Das Narayandas have conducted an interesting new study about compensation schemes for salespeople.  They conducted a field experiment with a Swedish electronics retailer.   The firm used a monthly quota system to motivate and reward salespeople.   The scholars tested the effect of shifting to a daily quota system.  What did they find? Overall revenue increased with the installation of a daily quota system. HBS Working Knowledge summarizes their conclusions:

They found that sales productivity increased by 4.9 percent, on aggregate, under the daily quota scheme. But the results were more dramatic among the lowest quartile of salespeople—those with the worst recent sales records in the company. That group saw an 18 percent increase in sales productivity under the daily quota.

Chung explains that low performers are susceptible to falling behind in a monthly quota scheme, becoming less motivated or less capable of meeting their quota the further they fall back. “So they just give up,” he says.

A daily quota, on the other hand, provides “a fresh start every day in which past performance does not affect current payoff and thus does not disturb current motivation,” the researchers write. “For high-performing salespeople, because they are more immune to the disutility of effort, even if they experienced bad luck earlier in the month, they would put in the additional effort necessary later in the month to meet their monthly quotas.”

However, this finding is not the end of the story.  The scholars also examined the type of products that these employees sold before and after the change in quota scheme.  As it turns out, the retailer sold many more low-priced goods with the new quota scheme, but fewer higher-priced, higher margin items.  Why?  The higher-priced items took more time to sell.  Thus, the daily quota system created a powerful incentive to push the items that were easiest to sell (the low-priced goods).  

What's the lesson of this story?  You have to decide what your strategic objectives are.  If you want volume, a more frequent quota makes sense.  If you are interested in being very successful at the high end of the market, then you do not want the quotas to be as short term in nature.  

Alumni & The Recruiting Process

Scholars Jason Greenberg and Roberto Fernandez have conducted an interesting new study about job searches and MBA recruiting. They studied approximately 600 students from a top MBA program over two years.  They conducted the research from a sociological perspective, comparing students who landed jobs through connecting with alumni at various companies (search through social networks) to those students who were hired through formal on-campus recruiting programs (formal search).   They refer to connections with alumni as weak ties (i.e., the students did not necessarily know the alumni prior to the search process; they connected with them through a variety of networking activities).  They found that MBAs are much more likely to accept a job offer landed through alumni networking than through formal on-campus recruiting processes.   That's true, even though the compensation tended to be higher from offers derived through on-campus recruiting programs.   Why is the networking so influential and effective?  Those conversations and connections help the students understand the growth potential associated with a particular job, and that proves to be very important to many talented students... more important than compensation perhaps.   Here's an excerpt from the abstract of the academic paper that the scholars published:   

We find that contrary to conventional wisdom, search through social networks typically results in job offers with lower total compensation (-17 percent for referrals through strong ties and -16 percent for referrals via weak ties vs. formal search). However, our models also show that students are considerably more likely to accept offers derived via weak ties. They do so because they are perceived to have greater growth potential and other non-pecuniary value. On balance, our tests are consistent with Granovetter’s argument that networks provide value by facilitating access to information that is otherwise difficult to obtain, rather than providing greater pecuniary compensation.

What's the implication of this study?   Greenberg puts it this way:  “Based on our findings, recruiters earn a higher ROI when spending time and money on facilitating connections between current employees and potential recruits from their alma mater.   Students look to and trust an alumnus from their school who ‘looks like them in three years’ to provide inside information about growth opportunities within the firm. And that powerful association is a huge influencer when it comes time to accept or reject a job offer.”

P&G Overhauls Bonus System

The Wall Street Journal reports today that Proctor and Gamble has chosen to overhaul its bonus system for managers. According to the newspaper, 

"Starting Friday, annual bonuses for thousands of senior managers will be tied more directly to the performance of each leader’s specific business unit instead of being based on the company’s broader, regional operations. “We are trying to get a clearer line of sight between an individual’s responsibilities and their results and their compensation,” Chief Financial Officer Jon Moeller said this week in an interview.

P&G has been trying to reduce bureaucracy, give managers more autonomy to make key decisions for their units, and hold people more accountable for results.  This compensation system change fits with those other efforts.  You should not tie compensation more directly to a specific unit's performance unless you provide the unit manager with a sufficient level of autonomy to make important decisions.

We should keep in mind, however, that no compensation system is perfect.  Diversified firms, in particular, always face a tension between tying compensation to local unit performance vs. the results of large segments or even the corporation as a whole.   One the one hand, you want people to realize the benefits of managing their units effectively.  On the other hand, related diversifiers such as P&G want managers to cooperate with the heads of other units so as to realize important synergies.  The risk of this latest move for P&G is that managers may become too parochial, not thinking enough about how to collaborate with other units to achieve economies of scope.   

Internal Promotions vs. Switching Companies

Wharton Professors Matthew Bidwell and Ethan Mollick have conducted research on external vs. internal mobility of employees during their careers.   Here's what they have found (excerpt from interview with Professor Bidwell by Knowledge@Wharton):  

We found quite big differences between the moves that took place inside the firms, and the moves that took place across the firms. When people are moving inside firms, we saw that they got a pay raise. They also got quite a big increase in responsibility — they tended to rise up, in terms of their title. And they pretty much doubled the number of people that they were managing.

When people moved jobs across firms, they also got a pay raise, but it didn’t tend to come with an increase in responsibilities. Instead, they were moving to a job with often a similar title, and usually with the same number of subordinates — managing the same number of people. And so they weren’t necessarily getting a promotion in the same way.

This speaks to the different reasons for moving. When people are moving inside [the firm], they’re moving up the ladder. When people are moving to jobs in other firms, they’re getting a pay raise. They get paid to move. But they’re not making the same kind of move up the ladder. They’re moving to a similar rung, albeit in a different organization.

The authors offer several cautionary notes for firms and employees alike.  For companies, beware that you are often going to have to pay a premium when relying on external talent to fill key positions.   You pay that premium even though you often are not providing that person with additional responsibilities relative to what they had at their previous firm.   For employees, beware that hopping from one firm to another may get you an immediate pay raise, but it may delay future promotions and pay increases, costing you money down the road.   The authors do not suggest that one should stay at the same firm forever.  However, they do caution against taking a job at a firm where career advancement seems unlikely.   Being able to land a few promotions before moving to another company can be the better long term strategy for career advancement, development, and compensation. 

Evaluating Your People: The Bell Curve Does Not Apply

Josh Bersin has written a fascinating article for Forbes about measuring the performance of your people.   He argues that many performance appraisal systems are flawed because they presume that performance follows a Bell Curve (normal) distribution.   However, Bersin points out some new research that suggests that a Bell Curve does not apply.  He states, "Research conducted in 2011 and 2012 by Ernest O’Boyle Jr. and Herman Aguinis (633,263 researchers, entertainers, politicians, and athletes in a total of 198 samples). found that performance in 94 percent of these groups did not follow a normal distribution. Rather these groups fall into what is called a “Power Law” distribution."  

What does that mean?  A "Power Law" distribution has a very small number of exceptional performers, a wide swath of people who are solid, but not great, performers and a few folks who are substantial underperformers.   The high performers are so exceptional that they drag the mean up quite significantly.  In other words, it's a skewed distribution.   The median falls below the mean.   Put another way, most people fall below the mean.   

You can see the problem with performance appraisal systems, particularly those "rank and yank" systems that assume a normal distribution.  You can also see why some factors other than public policy may be driving income inequality.   In many industries, these "hyperperformers" get paid extremely high sums of money.  Finally, Bersin offers some thoughts on how we think about the large number of people "in the middle" of the distribution:

The power law distribution (also called a Paretian Distribution) shows that there are many levels of high performance, and the population of people below the “hyper performers” is distributed among “near hyper-performers” all the way down to “low performers.” [] You still have a large variation in people and there will be a large group of “high-potentials,” a group of people who are “potential high-potentials,” and a small group who just don’t fit at all.  The distribution reflects the idea that “we want everyone to become a hyper-performer” if they can find the right role, and that we don’t limit people at the top of the curve – we try to build more of them.

Would You Like That Bonus in Cash or Some Other Form?

How should you reward people?  What concerns should you have about offering rewards to your employees?   One important factor to consider: Will the employees compare rewards with one another?  Will those who receive smaller rewards be highly dissatisfied?   Extensive research shows that people engage in social comparisons.  They care not just about how much they receive, but how much they receive as compared to their peers.  Kellogg Professor Neal Roese and doctoral student Jingjing Ma have conducted some fascinating research with regard to reward comparisons.   They have shown that making rewards less "countable" can reduce the "likelihood that recipients will compare rewards, which in turn increases their satisfaction." 

The original experiment went as follows.  They created two groups of students: an "overbenefit" group and an"underbenefit" group.   The groups split a fixed reward 60/40.   One half of each group received a "countable" reward - i.e. cash.  The other half received an "uncountable" reward - i.e. a slice of cake.   Naturally, people who received higher rewards were more satisfied in both cases (cash and cake).  However, between the two "underbenefit" groups, the recipients of cake were much less dissatisfied than the recipients of cash rewards.  

Kellogg Insights provides the scholars' explanations of this result: "According to Ma, offering cake encouraged the recipients to focus on the experiential aspect of their reward—'oh, this cake is delicious,' she says—instead of 'thinking about how they received less than the other guy.'"

Chevron Cuts Executive Compensation

The Wall Street Journal reports today that Chevron's Board of Directors has cut compensation for senior executives at the firm, despite stellar financial results.  What's the reason?   Apparently, Chevron has had a spotty safety record over the past year or so.  Therefore, despite strong financial performance, the bonuses for top executives have been scaled back.

Now, the total compensation numbers are still very high.  So, I don't think anyone is crying about the compensation changes.  However, the move does send an important message.  Unlike many other firms, Chevron's board is saying that financial performance at all costs will not be rewarded.   A strong safety culture has many facets, so incentives alone will not improve safety.  However, incentives are a key component.  You have to reward the right kinds of behaviors if you want a strong safety culture.  You also have to send the right symbolic messages.  Chevron seems to have taken a step in the right direction. 

Peer Comparisons & Compensation: Law of Unintended Consequences

Claudine Gartenberg and Julie Wulf have written a paper on executive compensation that you may find interesting.  They examined the effects of the 1992 SEC Proxy Disclosure Rule, which increased the transparency of executive compensation at publicly traded firms.  While transparency is generally a good thing, they found a somewhat unfortunate unintended consequence.   After the ruling, executives became more aware of the compensation received by their peers, and they engaged in more comparison to those peers.  Those comparisons resulted in a convergence and ratcheting up of executive compensation.  The effects proved to most pronounced among geographically dispersed firms.  The scholars argue that those executives had a harder time knowing the pay of their peers before the SEC disclosure ruling.  Executives in firms of close geographic proximity already could compare compensation to one another through other means besides the company proxies. 

This study only confirms what I have felt for a long time, namely that compensation isn't just about the absolute level of pay.  It's about how you stack up against your peers. That is true within firms, as well as across firms.  You might recall Michael Lewis describing how traders compared their bonuses in his book, Liar's Poker.  A giant bonus could still be disappointing if surpassed by one's colleagues.  It may sound insane, but it's human nature. 

The real problem, though, lies with boards of directors.  It's one thing for executives to want to "win the compensation game" against their peers.  It's quite another for boards to escalate this competition.   Boards need to recognize the market dynamics, but they must guard against a "compare and ratchet up" phenomenon that has taken hold in many boardrooms. 

Biased Samples Hike Executive Compensation

When company boards of directors set executive compensation, they often benchmark against peers to determine the appropriate pay levels.  Unfortunately, as this Business Week article by Zachary R. Mider and Jeff Green indicates, many firms choose "peers" that are much larger than them.  Bigger firms tend to pay their executives higher salaries.  Thus, choosing to benchmark against bigger companies creates heftier pay packages.  For instance, the authors report that:

Setting the CEO’s salary is one of the most important duties of a public company’s board. So CBS (CBS) directors decided to give Chief Executive Officer Leslie Moonves a $69.9 million pay package last year only after assessing the competitive market for senior executive talent. The board of directors, however, looked at companies that are, on average, more than twice as large as CBS and included many in businesses far afield from media.

CBS is not alone though. The practice appears pervasive in publicly held corporations.   According to the authors, four of five academic studies that they found on this subject demonstrated evidence of bias in the selection of peer groups by boards of directors.   Why do directors build these clearly biased peer groups?  They want to stay in the good graces of the CEO, and they are often executives themselves... and would like similar treatment when their compensation packages are set.

External vs. Internal Hires: The Pay-Performance Gap

Wharton Professor Matthew Bidwell has conducted some fascinating new research that contrasts external vs. internal hires.   Do people hired from the outside get paid more than internal workers doing comparable work?  Do external hires perform better or worse than their internal counterparts?   Bidwell finds that external hires get paid substantially more than internal workers.  Why?  His research shows that, on average, they tend to have more education and experience than internal workers (in other words, their resumes look stronger).  However, a strong resume doesn't necessarily equate to on-the-job performance.   Bidwell finds that these external hires tended to do worse on merit reviews in their first two years at the new organization.  Moreover, they leave more frequently than internal workers.   If they survive those first two years, then they tend to do better, even getting promoted faster than internal workers.   However, those first two years can be quite rough, especially when you consider how much the organization is paying for this new talent.  

We should take a few key lessons away from Bidwell's research.  First, we have to be wary of becoming enamored with a beautiful resume.  Credentials don't necessarily translate into performance.  Second, we have to recognize that the first year, even for quite competent folks, can be a difficult transition period.  Acclimating to a new culture, new processes, and new colleagues can be very challenging.   Finally, in baseball, we often hear that general managers "fall in love" with their own minor league prospects.  They sometimes overvalue them, and demand far too much in return for trading them.   Others "fall in love" with outside free agents and give up a great deal to acquire that "external" talent.  In business, it seems that we often undervalue our own "prospects" in favor of the free agents.  We have to focus on developing our internal talent and assessing it fairly and accurately. 

Do You Want Your Peers to Set Your Bonus?

Rachel Silverman of the Wall Street Journal writes today about an interesting new human resources strategy being employed by several firms.  These companies have given employees the opportunity to determine the bonus compensation of their colleagues.  Here's how it works:

Coffee & Power, a San Francisco odd-jobs start-up, granted each of its 15 full- and part-time employees 1,200 stock options this past January, to distribute among co-workers in whatever way they chose. A worker can plunk all his options onto one colleague or split them among the group, so individual bonuses are tied to how co-workers perceive each other's work."  It lets me reward people that management may not always recognize," says Becky Neil, who works in marketing and product management. "This person who has a big title—maybe he didn't actually contribute that much."  Exchanges like those at Coffee & Power make the labor market of an individual office fluid, crowd-sourced and open to constant feedback. Allowing employees to vote on one another's performances also holds workers accountable and raises the stakes for those who don't contribute, managers say. On the flip side, there is a chance these markets could devolve into popularity contests, or lead to hard feelings among those who aren't recognized by the group.

Some companies have experimented with this type of process, though they haven't actually based compensation on the employee input.  Instead, companies such as At HCL Technologies of India have provided workers virtual currency to allocate among their peers.  The imaginary currency allocation is then used to determine how to provide recognition to excellent performers, though it does not translate directly into changes in compensation. 

I think the notion certainly is quite interesting, and I'm intrigued to learn more about firms trying to implement such systems.  I would offer one additional word of caution not cited in the article though.  Such a system may be effective in a small start-up, in which everyone knows what others are doing.  It may be more problematic in a larger, more complex organization in which individuals do not have an accurate understanding of their peers' contribution to the organization.  In those instances, giving employees an opportunity to rate their peers in this manner may lead to erroneous conclusions... and then hard feelings and other negative consequences.   

The "Married Men" Wage Premium

For years, economists have explored the reasons why married men tend to earn more than single men, holding all else equal.  Now we have a fascinating new study that looks at this phenomenon in the context of major league baseball.  Exploring this issue in sports proves fruitful, because we can actually measure individual productivity more accurately using an array of statistics.  Scholars Francesca Cornaglia and Naomi Feldman recently found  that married baseball players also earn more than single players.  However, they found that the married players were NOT more productive than their single counterparts. What could explain the premium then?  Cornaglia and Feldman discovered two interesting nuggets in their research.  First, the married players tended to exhibit a bit more stable and consistent performance.  That consistency might be quite valuable.  Second, they found that having more married players on the team tended to be associated with higher attendance (and therefore, higher team revenue).  The results proved statistically significant.  What could be occurring?  The authors speculate that the married players and their wives might be engaging in a variety of activities that bolster the team's image, and therefore, increase the popularity of the club.  For more on this study, you might wish to listen to this interview with the authors on BBC radio.

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. 

Are Gifts Better Bonuses Than Cash?

The Wall Street Journal reports on a new study published in the American Economic Review.  Sebastian Kube, Michel André Maréchal and Clemens Puppe conducted an experiment, in which they compared workers' productivity when given a bonus vs. those in a control group.   Actually, they set up two different types of bonuses:  a 7 Euro cash bonus and a gift of a thermos worth 7 Euros.   They found that the workers promised the gift as a bonus were significantly more productive than those given cash, whether told the value of the thermos or not.

Now, one could conclude that the researchers have shown that gifts might have a better incentive effect in the workplace than cash.  However, I think we need to proceed with caution - a great deal of caution!  Here we have a simple experiment with the bonus only worth 7 Euros.  Would the same effect hold in the workplace if the amount of the bonus were much more substantial?  That's not clear to me at all.  So, while the experiment may be thought-provoking, I'm not sure it provides us practical guidance as to how to design incentive schemes for the workplace.