David Burkus is a professor of management at Oral Roberts University and editor of LeaderLab, an online think tank that shares research and best practices through articles, videos and podcasts. His debut book, “The Portable Guide to Leading Organizations,” empowers readers by providing a brief and entertaining primer on the history of empirical research on leadership, management, motivation, strategy and change.
Motivation is a big industry. From incentive and recognition trade shows to compensation consultants, there are a host of industry experts ready to carefully craft the perfect program that keeps employees working happily and productively. Most of these experts adhere to the economic principle of agency theory, which says that individuals work for their own self-interest.
To best leverage this principle, these experts offer just the right trinket, or they design an elegant incentive compensation solution tailored to your needs. All of these offers assume that simply having financial incentives triggers people to work harder, which makes performance-based compensation almost a given.
Almost.
According to research from Ian Larkin, assistant professor at Harvard Business School, social comparison — our natural tendency to measure ourselves against our peers — may be the most powerful workplace motivator. So performance-based compensation might not matter as much as how that pay compares with peers in the organization.
Larkin’s research examined sales representatives at an enterprise software firm whose compensation was largely commission-based. Their commission structure also contained a “commission accelerator,” which offered salespeople higher bonuses as they made more sales in a given quarter. However, the company also maintained an annual “President’s Club” recognition program, which rewarded salespeople for being in the top 20% of all representatives.
The commission structure favored salespeople who could close many deals in one quarter, but the recognition program favored salespeople who spread their large sales out over an entire year. Representatives on the borderline of induction into President’s Club often faced a choice: Close the deal in the same quarter as other deals and be paid more, or wait until next quarter and boost their ranking compared to their peers.
Larkin discovered that salespeople who were on the borderline of club induction were willing to buy their way in by sacrificing their commissions. He was even able to calculate their “willingness-to-pay” — the amount a salesperson was willing to forgo in commission to be inducted into the club. The average salesperson was willing to pay $30,000 or 5% of their total compensation, just for the non-monetary recognition of President’s Club.
Organizational leaders need to consider the lessons of social comparison when designing motivational programs and compensation plans. When employees decide how much effort to exude, they don’t merely respond to their own pay but also to how their pay compares to that over their peers.
Strict pay for performance, then, might hold unintended consequences; employees on the borderline of top-level status may cheat or sabotage others to get there — likewise employees who are outside the cutoff may grow to resent their colleagues if they feel their own efforts are underpaid.
The implications of such research are that standardized salary scales and ancillary incentives may serve to better motivate the entire workforce and better encourage team collaboration. Whatever compensation plan is chosen, leaders need to realize the social comparison is a real factor and develop a plan that best leverages what really motivates.