How much did you say my coworkers make? An example of relative deprivation

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Here’s some information the business majors taking your Intro Psych class should be thinking about.

During the social psychology chapter, pose this question to your students: Is it good for employees to know how much money their managers and their coworkers are making? Why? Give students a couple minutes to think about this. If you’d like, let students discuss with one or two people around them. If you have an audience response system, ask each question separately. “Is it good for employees to know how much money their managers are making?” Ask volunteers to share their reasoning. Next, ask “Is it good for employees to know how much their coworkers are making?” Again, ask volunteers to share their reasoning.

Zoë Cullen (Harvard Business School) and Ricardo Perez-Truglia (UCLA) wondered the same thing. You’re welcome to read the working paper or a summary written by the authors for the Harvard Business Review.

Managers (vertical inequality)

Cullen and Perez-Truglia (Cullen & Perez-Truglia, 2018) asked a couple thousand employees of “a large commercial bank in Asia” to guess how much their manager made. They thought that their managers made about 14% less than they actually did. The researchers then randomly assigned the employees to either learn how much their managers actually made or to remain in the dark.

With the assistance of the bank, researchers “gathered daily timestamp, email, and sales data for the year following our survey.” Learning that their managers made more money than they thought resulted in employees working more hours, sending more email messages, and selling more than those who did not learn how much their managers actually made. In fact, the more off employees were in their estimates, the more work they did. And the closer the manager was on the corporate ladder to the employee, the more pronounced the effect. “[A]fter realizing that these managers get paid more, employees became more optimistic about the salaries they will earn themselves five years in the future.” 

Coworkers (horizontal inequality)

Cullen and Perez-Truglia (Cullen & Perez-Truglia, 2018) asked those same research participants to guess the salaries of “the other employees with the same position and title, from the same unit.” While the participants were closer in accuracy with their guesses than they were with managers, most still underestimated how much their coworkers were making. Again, participants were randomly assigned to learn how much their coworkers actually made or to remain in the dark.

Using the same “daily timestamp, email, and sales data for the year following our survey,” researchers found employees worked less than their in-the-dark counterparts. And they didn’t work just a little bit less. “ Finding out that peers earn on average 10% more than initially thought caused employees to spend 9.4% fewer hours in the office, send 4.3% fewer emails, and sell 7.3% less.”

This is a beautiful – if unfortunate – example of relative deprivation. Relative deprivation is “the perception by an individual that the amount of a desired resource (e.g., money, social status) he or she has is less than some comparison standard. This standard can be the amount that was expected or the amount possessed by others with whom the person compares himself or herself” (American Psychological Association, n.d.) When we experience relative deprivation, we feel worse. And when that relative deprivation is experienced in a work setting, that feeling worse translates into working less.

Discussion

Ask your students to imagine that they are employers. How might they handle salary information? Would they be transparent, letting everyone know how much everyone is paid? Would they release average salaries by position type rather than attach names to salaries? And should different people who hold the same position be paid different salaries?

Cullen and Perez-Truglia (Cullen & Perez-Truglia, 2018) offer a couple suggestions.

1. “[K]eep salaries compressed among employees in the same position, but offer them large raises when they get promoted to a higher position.”
2. “[T]ransparency about average pay for a position, without disclosing individual salaries.”

The researchers conclude their Harvard Business Review article with this advice.

We encourage you to start experimenting with transparency at your company.  The first step is to figure out what your employees want. You can find out through anonymous surveys. Just mention some alternatives that you consider viable, and let them voice their preferences. For instance, do your employees feel informed about their salaries five years down the road? Would they want to find out the average pay two or three promotions ahead? Once you look at the survey results, you can decide what information to disclose and how. According to our findings, signals about the enticing paychecks waiting five years in the future is the push they need to be at their best.

References

American Psychological Association. (n.d.). Relative deprivation. Retrieved December 26, 2018, from https://dictionary.apa.org/relative-deprivation

Cullen, Z., & Perez-Truglia, R. (2018). The motivating (and demotivating) effects of learning others’ salaries. Retrieved December 27, 2018, from https://hbr.org/2018/10/the-motivating-and-demotivating-effects-of-learning-others-salaries