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Do Employees Work Harder for Higher Pay?

In a recent field study, Duncan Gilchrist, Michael Luca, and Deepak Malhotra set out to answer a basic question: "Do employees work harder when they are paid more?"

Published: Dec 9, 2013 07:17:40 AM IST
Updated: Nov 21, 2013 05:25:06 PM IST

In a famous scene from the film "Jerry Maguire," NFL wide receiver Rod Tidwell repeatedly screams, "Show me the money!" as his agent listens on the other end of the telephone. Intuition might tell us that showing the money motivates, and that increasing an employee's salary should correspondingly boost his or her motivation. It does—under certain conditions. The evolving field of behavioral economics is challenging the assumption that more money inevitably leads to increased effort.

In a recent field study that he conducted along with Harvard colleagues Duncan Gilchrist and Michael Luca, Harvard Business School Professor Deepak Malhotra set out to answer a basic question: "Do employees work harder when they are paid more?" As Malhotra, the Eli Goldston Professor of Business Administration, said in an interview, "Previous research has shown that paying people more than they expect may elicit reciprocity in the form of greater effort or productivity." Malhotra and his research team, however, found that paying more only led to greater productivity when the additional pay was presented as a gift, with no strings attached.

In the field study with 266 workers, three groups were hired to do a one-time, four-hour data entry task via the Internet labor market oDesk.com, which allows for online recruitment of freelancers from around the world.

"Keep in mind," Malhotra said, that "all of these people previously made less than $3 per hour where they live." Employees in one group did not know of the existence of the other groups. One group was given a lower starting pay rate ($3 per hour) and another a higher one ($4 per hour). Evaluating the work effort and performance of the low-pay versus the high-pay group, Malhotra said that "employees who were promised $4 worked no harder than those who were promised $3." Higher pay didn't lead to statistically better performance.

"When someone is paid $4," said Malhotra of the findings, "even though it is more than they are used to making or expecting, there may be no reason for them to interpret this as a gift or concession from the employer. More likely, they just assume that their expectations were wrong, and $4 is 'the going rate' for this type of work." So paying more elicited about the same employee effort as the lesser rate.

The third group brought the most provocative results. Its members were initially offered $3 per hour, but then received a surprise $1 increase to match the higher-pay group. The pay increase was not related to performance. It was offered immediately after employees had agreed to work for $3 because, they were told, "we have a bigger budget than expected." So the additional dollar was perceived as a gift, Malhotra said.

"Those who were promised $3 but then later were given an additional $1 worked significantly harder than the other two groups," he said. "We attribute this to the salience of the gift: It was obvious to them that we didn't have to give this additional compensation, but that we had chosen to." The gift "signaled that we had done something nice for them which they may want to reciprocate." And they did reciprocate, with higher productivity.

Indeed, the "gift" group of workers performed with "roughly 20 percent higher productivity than both" the other groups, the study said. And for some employees who had more experience, the boost in productivity was much higher. Moreover, the gift group maintained better focus throughout the work, and performed especially well late into the assigned task.

What do these findings, which Malhotra described as "$3 + $1 is more than $4," mean for real-world companies? He suggested that companies should "think carefully not just about what to pay employees, but also how to pay them. The same amount of compensation can be structured in ways that will be more or less appreciated and reciprocated."

Malhotra also believes that companies need to consider what other factors motivate employees. "There is a lot of work that shows non-monetary incentives (e.g., recognition, respect, autonomy, etc.) can be powerful motivators of behaviors in the workplace," he said. "The key is to understand you are dealing with human beings who work hard not simply because of financial incentives, but because of a whole host of other factors."

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[This article was provided with permission from Harvard Business School Working Knowledge.]

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  • Pramod

    Interesting Article to be read and deliberated!!

    on Dec 12, 2013
  • Jr20

    Do Employees Work Harder for Higher Pay? I think YES. Employees should pay as well whatever their boss gives them. May it be in a form of money, gift or any kind of reward for the efforts they\'ve done to the company. However, you can\'t always say that your employees will work harder when they got a higher pay. Some of them will slack at work, work for less hours, or will report late for work. But if you\'re working from home, everything is monitored and your time is logged in a database. So even if you got a higher pay you will still be accounted for whatever your work is all about. If you are using a time tracking software like TIME DOCTOR, you will always work diligently according to the scope of your task. TIME DOCTOR will not only monitor your time but it also tracks your productivity, attendance, lates and absences, daily/weekly/monthly reports and a lot more.

    on Dec 10, 2013
  • Anurag Gupta

    The study does not reveal anything new. A bonus/gift/incentive always has a motivational effect, and employers use it good effect. However, the flip side that the bonus becomes an expectation next time around, especially when the year-end pay-hike cycle comes. So if the \"gift group\" is asked to work on the same task again next year, they would assume $4 as a base, and expect $1 on top of it. At that time, the gift would become almost an entitlement rather than a motivation.

    on Dec 9, 2013
    • Alok

      Brilliant counter point Anurag. On a separate note, especially in the Indian context where bulk of the workforce in the private sector comes from middle-class families at the entry-level, money is indeed the single biggest motivator and fat pay hikes have a significant positive impact on performance and productivity. That\'s why top companies pay top money to hire cream talent at premier institutes. Even in service-based organisations, companies are paying outstanding performers well to retain them. This might change and the non-financial incentives may matter more in the long run (after the person has worked in the industry for 7-8 years or more) and is already drawing a lucrative salary.

      on Dec 17, 2013
      • Ashrith Harith

        I too second your opinion Alok. But with so many years of the advent of the giant corporates in India, the middle class has become a financially stable sector. Hope too see that passion is the motivation for a job and not money, at least in the couple of years to come.

        on May 12, 2014
  • Tanuja

    Employee pay is not related to work done by employee at all. Employee is a commodity in the market and his compensation is based on demand and supply. As long as there is large demand for talent and lack of adequate supply of this talent, the talent gets payed well. This explains why low skilled workers get lower pay, since the talent required for low skilled jobs is low. In country like India with abundant supply of manpower, but inadequate means of training, skill becomes highly paid, which acts as incentive for the people with insight to acquire this skills.

    on Dec 9, 2013