“Firms may want to motivate employees with the prospect of a higher salary upon promotion rather than through performance pay,” recommend experts. (Photo: Shutterstock)
People tend to be motivated to work harder when they learn how much their boss makes – but if their coworkers make more than them, they can become so resentful that they start slacking off, according to the study, “How Much Does Your Boss Make? The Effects of Salary Comparisons.”
Harvard Business School assistant professor Zoe Cullen and Ricardo Perez-Truglia, assistant professor at University of California, Los Angeles, conducted a field experiment with 2,060 employees from a multi-billion dollar corporation, and found that perceived peer and manager salaries have a significant causal effect on employee behavior. While higher perceived peer salary decreases effort, output and retention, higher perceived manager salary has a positive effect on those same outcomes.
It could be that employees only care about their standing in relation to their peers. An alternative explanation could be that, given that everyone has the same powers and responsibilities, they perceive these salary differences as unfair and are demoralized, according to the researchers.
“Employees may find it easier to justify vertical inequality — for instance, they may think that the manager deserves the higher salary because she adds more value to the firm or because she has to deal with more stress,” they write. “Firms may want to motivate employees with the prospect of a higher salary upon promotion rather than through performance pay.”
Salary transparency is a complicated issue, says human resources expert Rob Wilson, president of Employco USA, an employment solutions firm.
“The truth is that there won't be a one-size-fits-all approach that works for every company, but there are a few basic things that every employer should know,” Wilson says.
First, employees actually like to know that their boss is doing well financially.
“If the top tier people are struggling financially, that can make employees insecure and unmotivated,” he says. “Employees want to feel like they are being led by someone who is doing well for himself or herself. This is both aspirational and comforting, as they know that the company is in good hands and has a solid future.”
However, Wilson says that salary transparency among coworkers can become problematic.
“If an employee finds out that their coworker is making more money than them, but yet they are always slacking off or showing up late, that can really breed resentment and dissatisfaction,” he says. “So while salary transparency may make some people happy, it can cut both ways. If you want to make salaries transparent, first you really want to make sure that all of your workers are being fairly compensated and that there is no nepotism or poor behavior that is being rewarded.”
Ultimately, Wilson says that salary transparency should be led from the top-down.
“As this study shows, employees benefit more from knowing what their leaders make,” he says. “They want that inspiration. It is motivating and encourages them to work hard, whereas competing with the guy in the cubicle next to them can have the opposite result. So when it comes to talk of salaries, maybe be willing to show your own hand, rather than encouraging open talk among workers.”
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Katie Kuehner-Hebert
Katie Kuehner-Hebert is a freelance writer based in Running Springs, Calif. She has more than three decades of journalism experience, with particular expertise in employee benefits and other human resource topics.
