Current Issue
This Month's Print Issue

Follow Fast Company

We’ll come to you.

5 minute read

Know It All

The Science Behind How Pay Affects Productivity

To real people, it’s the thought that counts as much as the cash.

The Science Behind How Pay Affects Productivity
[Photo: Flickr user Monochrome]

In 2013, three Harvard researchers decided to see how different levels of pay would affect the amount of work they got.

On the freelancer contracting site oDesk, they posted jobs typing in CAPTCHAs, those hard-to-read words or codes used to authenticate that a real human is accessing a website. "This is a four-hour job, with the goal of entering as much data as possible while minimizing the number of mistakes," stated the postings. "Specifically, we need as many correctly entered words as possible in four hours because we need the data for a future task and only correct entries can be used."

One of the postings offered $3 an hour for the job. Another offered $4. From those who responded and qualified by having done data entry in the past, the professors replied, "Great, you are hired," to 136 at the $4 rate and 404 at the $3 rate.

From the group promised $3 an hour, the researchers peeled away 135 and gave them a surprise. "As it turns out, we have a bigger budget than expected," they wrote. "Therefore, we will pay you $4 per hour instead of $3 per hour."

$3 + $1 > $4

The group initially hired at $4 an hour worked no harder than those hired at $3. "When someone is paid $4, even though it is more than they are used to making or expecting, there may be no reason for them to interpret this as a gift or concession from the employer," said Deepak Malhotra, one of the researchers. "More likely, they just assume that their expectations were wrong, and $4 is ‘the going rate’ for this type of work."

But the group that hired on at $3, then got $4 per hour, worked substantially harder. Among those who were most experienced and had worked most recently—those who best understood the generosity of the surprise pay increase—the raise "actually increased productivity more than it increased cost." The difference between being paid $4 as the market rate or being paid $4 as the market rate plus the employer’s generosity may seem "innocuous," said the researchers, but it’s not.

In the employee’s mind, $3 + $1 is greater than $4. Generosity of pay leads to generosity of effort. Reciprocity affects the perception and effect of compensation as much as it affects everything else.

The Expectation Of Fairness

Chief financial officers and procurement managers are supposed to get things for the lowest price. In buying resources, that’s imperative. A great deal on a piece of land. Optioning oil at a three-year low. Locking in high-quality, exotic coffee beans when supply is high and demand is low. A volume deal on laptops. It’s just smart business.

The land certainly is not insulted that it was bought on the cheap. The oil does not burn cooler because it was acquired with a well-timed call option. The coffee is just as aromatic at the lower wholesale price. The laptops don’t operate any differently.

But when a chief financial officer or some other leader applies the resource procurement strategy to people, it quickly disintegrates. People are not just another category of resources that happens to be human. They expect fairness. They appreciate generosity. Their value to the company varies greatly depending on how they believe they are being treated. Positively and negatively, they reciprocate the intentions of their employers.

You Get What You Pay For

A company that treats its people like widgets, that demands its people work as hard as they can for the lowest possible wages, gets the mirror response in return: People who want to work as little as they can for the highest wages they can get.

Who can blame them? A company perceived as cheap implicitly gives permission to its employees to be miserly with their effort. Eventually, the company backs itself into the psychology of employees of Soviet state-owned enterprises in the 1980s: "They pretend to pay us; we pretend to work."

A firm can slog through under that kind of transactional, mutual selfishness, as many heavy with labor unions do, but the company will be at a structural disadvantage. Working relationships eventually fail when neither side really cares about the success of the other.

Employees are expected to look out for the long-term financial health of their organizations. Is it unreasonable to expect that the company should look out for the financial trajectory of the employee? In my own recent research, 38% of employees I spoke with say their companies understand this concept. Their firms, they say, are "actively helping me reach my long-term financial goals" and "want me to make more money as the organization becomes more profitable."

It’s with favorable attitudes like this about the intentions behind the pay that compensation gains real traction. Among Americans who strongly agree that their firm is helping them reach their financial goals, less than 4% want to defect, and an astounding 92% say their jobs bring out their best ideas. On the other extreme, among those who strongly disagree that their company wants to see them reach their financial goals, seven of 10 wish they were working somewhere else, and only 12% say their company gets their best ideas.

To Homo economicus—or "Econs," as behavioral economist Richard Thaler calls the fictional, idealized species that economists have invented (and which leads them to make so many bad predictions)—our survey statement, "Over the long term, I believe I can earn more here than I could somewhere else" would be more predictive than questions about the employees’ perceptions of their leaders’ intentions. It’s the opposite.

To real people, it’s the thought that counts as much as the cash.

This article is adapted from Widgets: The 12 New Rules For Managing Your Employees As If They're Real People (McGraw-Hill, April 2015) by Rodd Wagner, a New York Times best-selling author, employee engagement practice leader for BI Worldwide, and former principal of Gallup. It is reprinted with permission. Follow Rodd on Twitter at @Rodd_Wagner.

Related: Do You Know The Best Way To Ask For A Raise?