Yesterday I wrote an article about research that shows that too much compensation actually makes performance worse. A fellow Rotarian (thanks Skip!) sent me a link to a great video by RSA Animate that illustrates the issue and the research. If you haven’t seen it take a look:
The article is here: (Mega Executive Pay Leads to Poor Performance)
But the question is why does mega pay negatively impact performance? Here’s my theory.
The Psychology of Making Too Much Money – Barney and the Manna ATM
A man named Barney goes to withdraw $500 from his local ATM. Instead he is given $5,000. When Barney checks his balance it shows that no money was withdrawn from his account. He could go to the bank and let them know that he thinks the ATM has made a mistake but he doesn’t. Initially he is afraid that someone will discover the mistake and take the money away, but no one says anything and eventually Barney’s fear eases. Each week he goes back to the same ATM for another withdrawal and the same thing occurs. He tries other ATM’s, but he learns that it is just this one that gives him money for nothing. Soon he has built a life around getting $5,000 every week from this ATM. His fear has now subsided, but he feels a little guilty, but also a little evil.
One evening Barney is in a rush for the money and pushes a woman out-of-the-way to make his transaction. The woman is irritated but stands to the side while Barney enters in the information. When the money comes out she notices that he received $5,000 but only requested $500. She points this out to him and he denies it. She knows what she saw and she won’t be convinced. Barney offers to give her half of the money and she refuses the offer. She says she is going to tell the bank….What will Barney do to keep his lifestyle?
When examining behavior by executives and managers in the banking crisis of 2007-09, the answer to that question: “What will a man do to keep his lifestyle?” (I’m not being sexist, just accurate) is answered by the unethical business decisions that led to massive financial failures in 2008-09. Pay might purchase a person’s talents for an organization, but at a certain point, too much compensation begins to purchase the person’s ethical compass. Good decision-making is replaced by self-preservation and the future of the business is sacrificed for the financials of the current quarter.
The lesson is that too much compensation becomes a trap that will often lead to unethical decisions. Mega pay not only doesn’t improve performance, it lures executives to the dark side.
The Psychology of Making Too Little Money – Maslow’s Hierarchy of Needs
The other side of the issue is paying too little. In 1943, a researcher named Abraham Maslow published a paper titled: A Theory of Human Motivation. The work was based on examining successful people and their living situations. From his research he concluded that there is a Hierarchy of Needs that must be met in steps, with each step supporting the next level.
In Maslow’s paper he proposes that humans must meet their basic survival needs that contribute to sustaining life as the base level of life; however, security and safety needs are the next level. All levels above that (Belonging, Esteem, and finally, Self-Actualization) are dependent on the needs of the first two levels being met.
This is the key. Employers that fail to compensate their team to the point of a living wage should expect their staff to be in a constant state of crisis and that means they cannot expect these employees to be creative and innovative in dealing with the common issues that might arise with the customer. An underpaid employee will be in a constant state of personal crisis that will lead to many issues including reliability, focus, and attitude.
The question is how much is a living wage? That takes an individual examination of the job, the market, and the economy of the region. As the video suggests, you should pay enough to take money off the table as an issue.
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