Published:October 31, 2011
When evaluating compensation issues, economists often assume that both an employer and an employee make rational, albeit self-interested choices while working toward a goal. The problem, says Assistant Professor Ian Larkin, is that the most powerful workplace motivator is our natural tendency to measure our own performance against the performance of others. Key concepts include: •The most powerful workplace motivator is our natural tendency to measure our own performance against the performance of others. •Salespeople will actually give up the chance to make extra money if doing so will garner positive recognition from their peers. •In the age of social networking, employees are more likely than ever to share salary information with each other. Employers need to keep this fact in mind when designing compensation plans. About Faculty in this Article:
Ian I. Larkin is an assistant professor in the Negotiation, Organizations and Markets unit at Harvard Business School. •More Working Knowledge from Ian I. Larkin
•Ian I. Larkin - Faculty Research Page
Any parent can tell you that a surefire way to turn joy into rage is to offer your child a big candy bar—and then turn around and offer an even bigger one to his sister. Suddenly, a special treat turns into a great injustice. "Hey! How come she got more? That's not fair!" And any hiring manager can tell you that the world of business is not so different. "It really was all about the recognition of and comparison with their peers, and many of them were willing to pay for it." "This is why MBA programs send out lists of average salaries, and why students spend hours poring over those lists," says Ian Larkin, an assistant professor in the Negotiation, Organizations & Markets Unit at Harvard Business School. "You should see the angry e-mails I get from students when they find out that a job offer turns out to be $10,000 per year below the average. It's not that they really feel like an annual salary offer of $115,000 is unfair on its own. They might be perfectly happy with that salary if it weren't for the information that it's below average." And it's not just a matter of money. In several studies of social comparison in the workplace, Larkin has found that the most powerful workplace motivator is our natural tendency to measure our own performance against the performance of others. "Traditionally, [the field of] economics has held a very rational view of people, and there's a gigantic amount of literature focusing on financial incentives and the idea that simply having financial incentives causes people to work harder," he says. "But my research suggests that in deciding how hard we work and how well we think we're performing, social comparisons matter just as much." The $30,000 gold star
The power of social comparison can lead to irrational financial decisions, according to Larkin's 2009 paper "Paying $30,000 for a Gold Star: An Empirical Investigation into the Value of Peer Recognition to Software Salespeople." The paper describes a field study at a large enterprise software firm, where salespeople's salaries are largely based on commissions. The firm also features another common sales incentive--a "president's club" membership for those employees who sell more software than 90 percent of their peers in a given year. The software firm uses a "commission accelerator" program over the course of each financial quarter, meaning that a salesperson expecting a high-volume sale at the beginning of a quarter would receive a higher commission on any additional sales in the same quarter. A salesperson expecting a large sale early in the first quarter of the year would rationally want to delay any other potential sales until later in that quarter, so as to take advantage of the accelerating commission schedule. However, making the sale right away, before the end of the...