Study: Higher pay doesn't always translate into increased productivity

Staff Writer
Columbus CEO

(c) 2013, The Washington Post.

WASHINGTON — The idea that paying above-market wages will get more out of your employees is almost a bedrock of modern management theory. The more you pay people, the harder they'll work, many managers have long believed.

But a new study by researchers from Harvard Business School questions that conventional wisdom. In an experiment, the researchers found that paying higher wages does not necessarily boost productivity. However, when a raise was seen as a gift with no strings attached, rather than part of the hiring package, employees worked harder.

The study used oDesk, a global online network of freelancers, to hire 266 people to do data entry work. Because oDesk gave the researchers information about past work history and what freelancers had been paid, they had a sense of how the workers might respond to various levels of pay. It hired workers for whom a $3 and $4 per hour wage was an improvement on what they'd made in the past. While that may sound quite low, keep in mind the workers came from a global pool of candidates.

It divided the job offers into three types. One group was told it would be paid $3 an hour. Another group was offered $3 an hour, but before the work began, it got some good news: The budget had unexpectedly been increased, and workers would now get $4 an hour. The final group was offered $4 an hour from the start.

The results showed a roughly 20 percent higher productivity rate for the group that got the surprise bonus. Productivity was even higher among those with the most experience — perhaps their experience allowed them to work faster, or they knew enough to be impressed by the raise.

What does this mean for leaders? One of the researchers, Harvard professor Deepak Malhotra, thinks managers should weigh not just what employees should be paid, but also how they should be paid, structuring the pay budget so that it has the most impact. While managers may not be able to get the right people in the door in the first place if they don't pay enough, saving some of the budget for a later bonus could encourage people to perform better.

To me, the study also raises the question of whether managers could get more out of their people if raises and bonuses had a greater element of surprise.

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McGregor co-anchors The Washingon Post's PostLeadership blog that covers leading in changing times.