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In 2014, a University of Utah study on pay at the upper echelons of corporate management upended long-held beliefs that high compensation is linked to strong performance. According to the research, between 1994 and 2013 the best-paid CEOs in the U.S. actually turned in the worst performances as measured by stock price, racking up average losses of $1.4 billion per year in market value. The startling reason the CEOs performed so poorly, argued the researchers, was overconfidence.
Exorbitant pay, they theorized, made corporate chieftains less likely to pay attention to others’ views and more likely to ignore evidence that ran counter to their plans. “Companies want to have a glamorous, highly paid CEO,” said Michael Cooper, an author of the study and professor at the University of Utah’s David Eccles School of Business. “However, this runs counterintuitive to what is actually smart business. Businesses should reexamine how they approach executive compensation and incentives to maximize financial performance.”
Researchers who study behavior in the workplace say monetary rewards can indeed be a disincentive, and it can happen at all levels of an organization. Not surprisingly, given the growing body of research and controversy around CEO compensation, corporations are augmenting their focus on compensation strategy to avoid such scenarios.
“The key is for an organization to get behind a set of beliefs and principles around rewards,” said Tom McMullen, U.S. reward expertise leader for Korn Ferry Hay Group. “Companies need to ask themselves what is important? Is it time on the job? Share price? Sales? Team performance? Companies that get in trouble are the ones that haven’t articulated a compensation strategy or have not put it into action across the organization.”
What should managers watch out for? Here are eight of the most common reasons that money can become a de-motivator:
1. Despite generous paychecks, employees see the compensation as unfair
In the Ultimatum Game, a popular economic experiment created in 1982, participants are given options for making money. They can split a monetary reward evenly, unevenly or forgo it altogether. Repeated experiments show that players almost always prefer to earn nothing at all rather than receive less than the other player. Human beings care deeply about fairness, and this has a big impact on how our salaries can
“Bonuses, in particular, are a real challenge because of the perception of fairness,” said Tomas Chamorro-Premuzic, professor of business psychology at University College London and Columbia University. “People aren’t always rational. Most workers would actually prefer a lower bonus, as long as it was higher than the amount their colleagues received.”
How can companies ensure that their generous compensation packages aren’t sabotaged by a sense of unfairness? Corporations often attempt to conceal salary information so that workers are unable to compare their pay. However, this is generally unrealistic.
“People talk,” said Tom McCoy, president of The Employee Engagement Institute, which studies motivation in the workplace. “They’ll find out what the guy in the next cubby is making. We recommend instead that companies use total transparency to fight against any sense of unfairness.”
Yet this is easier said than done. Many societies see openness about salaries as crass, and workers may feel uncomfortable about making personal financial information public. Some companies, however, are overcoming such age-old taboos. Buffer, a social media management firm, has taken transparency to the extreme by publishing online not only its formula for compensation but its employees’ salaries as well. The formula takes into account factors such as job type, seniority and location. Other companies seeking similar transparency include such data as peer reviews or measurable achievements like sales levels.
2. The higher salary or compensation violates workers’ beliefs about their motivations or leaves them feeling isolated
Workers for a nonprofit organization, for instance, might feel that a high paycheck runs counter to their work and life goal of helping society, which is their main incentive for doing their job. In handing out big paychecks, managers should also be careful that their generosity does not crowd out other key sources of job incentive, such as a sense of camaraderie, or being part of a team.
In organizations with transparency around employee compensation, high compensation may, for example, breed resentment among a person’s co-workers, leading the employee to feel excluded. And exclusion is a powerful de-motivator. The neuroscientist Naomi Eisenberger of UCLA has conducted experiments that show human brains process rejection as if it were physical pain. University of Georgia research has revealed that a sense of exclusion—even subtle forms, such as being left out of an invitation to lunch—can wreak havoc in the workplace.
3. The pay is in excess of the individual’s needs
In 1943, the psychologist Abraham Maslow theorized that people are motivated by monetary rewards only to the point that they have satisfied their basic needs, such as food, shelter and safety. In a 2010 study, Princeton psychologists Angus Deaton and Daniel Kahneman found that workers’ needs are met, on average, with a $75,000 annual salary. Compensation in excess of that amount is less incentivizing. Yet an individual’s basic needs can vary: For one person, it’s the ability to buy food and pay the mortgage; for another, footing the bill for a child’s college education can be essential to a sense of well-being.
While the theory is easy to understand—the more beer we have in the fridge the less we value any single bottle—those in the field say pinpointing a compensation value that meets an employee’s needs is harder than it seems.
“It’s tough to have a universal truth in terms of absolute salary,” said McMullen. “Eighty-thousand dollars goes a lot further in El Paso, Texas, than in Silicon Valley. And even if people are no longer concerned about meeting their basic needs, they probably still want to be recognized.”
4. The job requires creative, out-of-the-box thinking
In a famous 1945 behavioral study, the psychologist Karl Duncker asked participants to attach a candle to the wall in such a way that the wax did not drip to the floor. Participants were given a box of tacks, matches and a candle. Most people tried unworkable approaches—tacking the candle to the wall, for instance, or trying to stick it to the wall with some melted wax. The solution was obvious after the fact. Take the tacks out of the box, attach the box to the wall using the tacks, and place the candle in it. Seventeen years after the Duncker experiment, Princeton Professor Sam Glucksberg added a twist: He offered payment to those who figured out the problem. The results were surprising. Instead of improving performance, the promise of a monetary reward actually lowered people’s ability to arrive at the solution.
In 1985, MIT researchers Richard Ryan and Edward Deci discovered that students who were offered financial prizes to solve complex puzzles were less successful than a control group doing the puzzles for fun. Ryan and Deci called the phenomenon—by which an extrinsic reward such as money inhibits a person’s motivation to perform a task—“overjustification.” They argued that by paying the puzzle enthusiasts, they became externally, rather than internally, driven. To operate at a creative peak, it seems, people need to derive pleasure from the task itself and not be distracted by the money.
Neurologists believe that another mechanism may be at work as well. They theorize that the promise of money and other rewards activates the brain’s fight-or-flight response and shuts down its problem-solving capabilities. Such “blocks” are familiar to those in creative industries. Writer’s block is one such example. For budding musicians, the “second album syndrome” is a feared phenomenon. Newly successful artists choke under the pressure of creating recordings as innovative and appealing as the ones that made them famous in the first place. Yet the phenomenon is by no means restricted to artistic endeavors; it covers all out-of-the-box thinking. In today’s work environment, where innovation is a paramount corporate goal, this pressure renders some employees incapable of getting the job done. How can companies avoid this effect?
A growing number of companies address this by decoupling creativity from salary, ensuring that workers are self-driven when it counts. The idea is to give employees paid time to do nothing but think and create. 3M, the office supplies giant, championed this approach in the 1970s, and soon hit gold when an employee thought up the Post-It during this free time. The biotechnology group Genentech and the Silicon Valley companies Google and LinkedIn more recently set aside up to 20 percent of employees’ time to explore their own interests. Such important offerings as Gmail, Google Maps and Google Reader all reportedly emerged from this practice.
Despite these successes, many corporations have been slow to embrace the idea of employee free time, and some later eliminated the practice. In 2013, for instance, Google cited its international growth as one reason it needed to replace the system with a more top-down approach.
5. Extremely high compensation creates independently wealthy employees who no longer need to work
In 1999, Bonnie Brown accepted a position as corporate massage therapist with Google, at the time a brand new start-up. After five years, her stock options were worth millions of dollars and she cashed in, quit her job and bragged that she was now the one receiving massages. The waves of newly minted millionaires are familiar in many industry sectors such as finance and investment banking. But in Silicon Valley, the wealth often cascades down to lower-level employees who were fortunate enough to join a start-up early and reap the benefits of stock options. Behavioral psychologists say lower-level workers, in particular, can become de-motivated in this way. A 2014 Harris Poll for instance, revealed that just 30 percent of those surveyed would keep their current job if they had $1 million.
Yet extreme wealth affects those at the upper echelons as well. In recently announcing his decision to give away 99 percent of his wealth, Facebook founder Mark Zuckerberg publicly acknowledged that greater amounts of money had ceased to be a source of motivation for him.
“The question,” said Tom McCoy, “is whether the person is able to find other things in their job—the sense that they’re contributing to society, for instance, or that it gives them the chance to interact with other smart people— to remain engaged with their work.”
6. Compensation is high but too routine
Unexpected rewards, say behavioral theorists, are a more effective incentive than those that have become routine. That may be why end-of-year bonuses are not considered useful in terms of motivating workers. The problem may be exacerbated by employees’ expectations that this year’s bonus will be larger than last year’s. “A company can easily get into a cycle of handing out a 10 percent bonus this year, 15 percent next and so on,” said Chamorro-Premuzic. “The year the employee gets a 5 percent bonus, what was supposed to be an incentive actually become a de-motivator.”
A possible solution is to offer smaller rewards throughout the year for jobs well done. One Mountain View, Calif., start-up, for instance, found that employees seemed happier with smaller, on-the-spot rewards, rather than a big end-of-year payment. The start-up’s CEO made it a practice to leave thank-you notes with small checks of about $100 on the desks of people she thought had performed especially well on a particular project. Yet even surprise rewards can quickly become routine. “The trick,” said McCoy, “is to maintain the surprise element. Once you start handing out the checks, employees may soon start to expect them.”
7. High pay for an individual violates a company’s values
Most corporations place a strong value on teams, and big differences in compensation can create tensions and undermine the strength of teams. Consultants say they repeatedly see this in Scandinavian countries and Japan.
“Singling people out can be very normal in some cultures, but not at all normal in others, and managers need to be sensitive to that,” said Hay Group’s McMullen. “I’ve seen that happen in Nordic countries, for instance, where there is less differentiation in individual pay. Principles for compensation need to be aligned with the unique culture of an organization. Even within a country there could be significant differences between one corporation and another.”
8. Diva Syndrome or Impostor Syndrome
Hollywood has often depicted its own rich and famous movie stars as uncooperative prima donnas who demand constant special treatment. Behavior theorists believe that certain people, when given very high monetary compensation, come to believe that they are superior to other workers. This belief can in turn lower their performance. The overconfident CEOs in the 2014 compensation study mentioned above may have been suffering from a form of Diva Syndrome.
Impostor Syndrome can be equally harmful. Impostor Syndrome, a sense of being undeserving of the rewards a successful person has attained, may be triggered by high compensation. In 1978, psychologists Pauline Rose Clance and Suzanne Imes discovered that 70 percent of the successful people they had interviewed admitted to feeling like a fraud at least some of the time. Those people believed their success could be attributed to others’ misplaced faith in them. A 2011 survey by the Institute for Leadership and Management found that women, in particular, were susceptible to Impostor Syndrome. The study named the phenomenon as a key reason why certain workers don’t seek promotions, or end up leaving their job altogether. Managers may avoid the most negative effects of Impostor Syndrome by making clear to that employee just why she is receiving such recognition and compensation.
In the long run, paying more only to see employee engagement decline is especially disconcerting for managers because it affects both top-line and bottom-line growth. But the problem must be kept in perspective. De-motivation seems to occur only under certain circumstances such as those outlined above, and is more prevalent at the upper echelons of management. In fact, those who monitor compensation issues say that overpaying workers is still relatively rare.
“More people feel underpaid than overpaid, whether it is true or not,” said McMullen.