Want to Retain Employees? Pay Their Bosses More

That appears to be the upshot of a recent study from the National Bureau of Economic Research, based on an experiment conducted with 2,060 employees from a large commercial bank. The study’s authors, Zoe Cullen of the Harvard Business School and Ricardo Perez-Truglia of UCLA’s Anderson School of Management, found that a 1-percent increase in “perceived manager salary increases” led workers to increase their own work hours by 0.15 percent. In other words, “the perception that your manager received a raise may actually cause employees to work more hours or be productive,” writes MarketWatch reporter Elisabeth Buchwald in a summary of the study.

However, a perception among employees that their coworkers are being paid more has the opposite effect: The study found that when people believe this is the case, they’re likely to work less hours, send fewer emails and (for those in sales positions) suffer a decrease in sales performance. For every 1 percent increase in a coworker’s perceived salary, employees will respond by decreasing the number of their own hours worked by 0.94 percent and it will increase the likelihood of their leaving the company by .225 percent.

For organizations, this suggests that employees view salary increases for managers as motivating while viewing increases for colleagues who do work similar to theirs demotivating. HR should consider designing their compensation programs accordingly, Cullen and Perez-Truglia write: “Because of these externalities, firms may find it optimal to load rewards vertically rather than horizontally. That is, firms may want to motivate employees with the prospect of a higher salary upon promotion rather than through performance pay.”

Although income inequality has gotten a lot of press in recent years, the results of this particular study suggest that workers are less bothered by big paychecks for their bosses (and, in fact, may find them motivating for their own performance) than by notable salary variations among their peers. The study’s authors also cast doubt on the concept of pay transparency, which has come into vogue recently with the rise of sites such as PayScale, Glassdoor and Paysa that shed light on what organizations are paying their employees. Among other things, pay transparency is promoted by its advocates as a way to reduce gender inequality in the workforce by making it easier to compare, for example, what men are making vs. women for similar jobs. However, “to the extent that employees are not bothered by vertical comparisons, our evidence suggests that these policies may not be as effective as previously thought,” Cullen and Perez-Truglia write.

Andrew R. McIlvaine
Andrew R. McIlvaine is former senior editor with Human Resource Executive®.