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Why Finance Experience Is Less Impressive To Adcoms

Knowing Your Boss’ Pay Makes You Work Harder

You find out you make less than a coworker with the same job title. You decide to put in less effort. In fact, you may even think about calling it quits.

That is, until you find out just how much your boss makes – especially when it’s even more than you expected.

A new Harvard Business School study finds that if your boss makes more money than you thought, you tend to work harder.

“Employees are motivated rather than embittered by their bosses’ higher salaries,” the authors of the study write. “The higher salary is aspirational. Employees have an extra incentive to work hard so they can be promoted and perhaps one day make their bosses’ pay.”

THE EXPERIMENT

The study was produced by HBS’ Zoe Cullen and the National Bureau of Economic Research’s Richardo Perez-Truglia. It focuses on a sample of 2,060 employees from a multi-billion dollar corporation. Through surveys and administrative records with data, the authors disclosed the salaries of others to tested employees.

“First, we document large misperceptions about salaries and identify some of their sources,” the authors write. “Second, we find that perceived peer and manager salaries have a significant causal effect on employee behavior.”

The study found that employees decreased their effort, output, and retention when peers had a higher perceived salary. In contrast, a manager’s higher perceived salary boosted these three outcomes.

THE IMPLICATIONS

What do these findings mean?

For one, pitting employees against each other, especially when it comes to pay, has negative impact on effort, output, and retention.

“That is, firms may want to motivate employees with the prospect of a higher salary upon promotion rather than through performance pay,” the authors write.

The evidence may also shed light on why employees tolerate pay discrimination, such as gender-based wage gaps, especially when it’s done so vertically.

“For instance, in the firm where the experiment was conducted, 92% of the gender pay gap comes from vertical differences and only 8% through horizontal differences – a similar decomposition has been found in firms in other countries such as the United States,” the study reads.

Sources: Inc, Harvard Business School