A Sticky Situation

In a world in which the typical CEO makes 204 times what the average U.S. worker makes, organizations' pay-transparency efforts could also bring unwanted attention to internal pay-disparity issues.

Wednesday, December 18, 2013
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For some managers, it's a nightmare scenario: One of their direct reports walks into the office, asks to speak privately, and then demands to know why a colleague doing a similar job is being paid quite a bit more than he or she is.

In a world in which the typical CEO makes 204 times what the average U.S. worker makes (according to research by Bloomberg), most employees understand that pay disparity is a given in today's workplaces. What they might have a harder time understanding is if a peer in the next cubicle makes significantly more money for doing essentially the same work.

In some cases, this information may lead employees to cheat or steal, according to new research by professors at three major universities that suggests there's potential for cheating even when the rewards are low.

The report, Cheating More for Less: Upward Social Comparisons Motivate the Poorly Compensated to Cheat, was written by Scott Rick of the University of Michigan, Leslie K. John of Harvard Business School and George Loewenstein of Carnegie Mellon University and is based on a series of social experiments conducted by the professors. The experiments suggest that dishonesty among low-paid workers increases if they find out others are getting paid more for the same work."We all know that economic gain is an important driver for unethical behavior," says Rick, assistant professor of marketing at the University of Michigan's Ross School of Business. "We know people can become out of sorts about salary differences, especially if they seem unjustified. But nobody had experimentally examined whether that could lead to misbehavior."

In the first experiment, subjects received either five cents or 25 cents for each self-reported correct response on a list of questions. Some participants knew about the difference in pay rates while others did not. When the different pay rates were made public, those paid five cents per correct answer cheated more often than those paid 25 cents. When the different pay rates were kept private, those paid 25 cents cheated slightly more.

In the second experiment, two groups were created. In the first group, low-paid subjects were told there were others in the room getting more for performing the same task. In the second group, the low-paid subjects were told there was a higher pay rate, but that everyone in their session would be paid the same. The researchers found there was a higher rate of cheating in the first group than in the second group, where little cheating took place.

"We were surprised to learn that ours was the first study to show that these relative comparisons can have organizationally meaningful effects in terms of people's behavior -- not just making them feel bad or depressed, but leading them to actually cheat," says Rick.

What do these results mean for organizations?

"It raises questions as to how much pay disparity we should have in organizations," he says. "There are certainly benefits to compensating the best people at the best wages, but there are costs to this as well. Are we opening ourselves up to the risk that lower-paid people will hurt us by stealing, cheating or just being lazy and sloppy -- performance-stealing, in other words?"

Kerry Chou, senior practice leader on compensation at Scottsdale, Ariz.-based WorldatWork, says the findings from the study are consistent with those from prior studies that examined worker attitudes about pay. They also correlate with "equity theory," which states that "individuals are constantly comparing their contribution to an organization versus the rewards they receive and the perceived contributions and rewards their peers receive," he says.

"The goal, for people in general, is for that equation to be equal," says Chou.

There are some significant caveats to the Cheating More for Less study, he says, notably in that the pay differentials among study participants was determined by a coin toss.

"That's an extremely random effort for determining pay, which almost gives the subjects more of an incentive to cheat," says Chou.

The subjects' reaction to the pay discrepancy wouldn't necessarily translate to the real world, either, he says.  

"Most employees are not going to start cheating or stealing if they learn that the person next to them, who they feel is doing the same level of work, is  nonetheless getting paid more," says Chou. "However, it would not be uncommon for them to think to themselves, 'I'm obviously not as valued as the next guy, so I'm not going to be as engaged.' "

Some organizations make it relatively easy for employees to find out how much a colleague is making, says Chou, citing the federal government as a prime example. "In civil service jobs, if you know someone's government-service level and years of experience, it's not hard to determine how much they're making," he says.

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A small number of private-sector firms have deliberately made workforce pay transparent, including SumAll, a New York-based data-analytics company. As profiled last winter in the Wall Street Journal, the company allows its 30-plus employees to click on a shared hard drive that lets them view their colleagues' pay, along with their equity and bonuses. CEO Dane Atkinson told the WSJ that people work more efficiently when freed of doubts about salary and better understand their individual contributions to the whole group. Anyone hired into the company must be comfortable with the system, he said.

Compensation expert Laura Sejen describes pay transparency as "very rare and not a best practice." However, most companies do need to be more transparent in how they communicate their pay policies to employees, she adds.

"It's important to communicate as transparently as you can so you have the best possible understanding as to how pay policy is set," says Sejen, Towers Watson's global head of rewards. "If you do this, employees are less likely to be dissatisfied."

Explaining the topic of how pay is calculated requires a serious effort, says Chou. " 'What do we value, what kinds of behaviors are going to command high rates of pay, high levels of bonuses' and so on?" he says. "Many companies don't do a good job of this."

Should an individual employee find out that a peer is making more money than they are, managers should avoid trying to explain why the colleague in question is getting more, says Sejen. Instead, "have a candid conversation about why the complainant's pay is what it is, all of the considerations the company makes in determining her pay and, hopefully, it will be justifiable so the employee at least understands why her pay is what it is."

It's incumbent upon HR to ensure managers have the tools necessary for doing this effectively, she says.

"In our practice, we recommend more versus less communication, with the objective of heightening employee understanding of the variables that determine pay and understanding the opportunities that might be available to them to reach the next level," says Sejen. "Ensure your communication around pay is clear, timely and comprehensive."

Despite the widespread disparity between worker and CEO pay at today's companies, most employees remain more concerned with what the person in the next cubicle is making, says Rick.

"Differences in pay is something that people obsess over," he says. "It does seem rather dangerous to reveal these differences."

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