When Envy Trumps Ambition

Do you know how much your coworkers get paid?

The answer is almost sure to be no, since as both a bargaining strategy and a tool to limit jealousy between cubicle-mates, companies want to keep pay information under wraps. But there's another reason that employers may want to protect compensation information: A worker's knowledge of their own place in the pecking order could "motivate" them to slack off.

There's been a lively debate among economists in recent years over the importance of relative, as opposed to absolute, income. One side, let's call them the absolutists, says people derive feelings of well-being from how much they make regardless of where they are in the food in chain, and the chance to make more money should in most cases motivate people to work harder. The relativists argue that people don't make decisions in a vacuum, and a person's rank (compared with neighbors, coworkers, classmates) influences their actions.

The impact of the green-eyed monster has been shown a number of times in laboratory settings. The typical setup goes like this: John is given the task of splitting up $10 between himself and Matt. When John offers Matt a deal that has John keeping most of the money, Matt tends to reject the offer -- even though on an absolute scale, Matt would be better off.

The criticism leveled against these experiments is just that: Since they're conducted in an unnatural lab environment, they're not representative of how people act in real-world situations.

Evidence of how we might change our behavior in the face of perceived inequity has been hard to come by since, as I mentioned above, companies aren't keen on giving that information out. So a group of Swiss economists turned to the tried-and-true world of sports research where both pay and performance data is easily available.

The researchers looked at how the performance of athletes in the N.B.A. and the German premiere league was influenced by their relative income rank on their team. Did the higher salaries at the top motivate a player getting paid below average to improve his performance? The short answer is a big fat no.

They found that while a player's absolute level of play had a large impact on his output, the lower-ranked a player was on the pay scale, the higher the chance that his output would drop -- regardless of his natural ability. (Overall, the positive impact of a player's salary was twice the size of the negative impact from having a low rank.)

The researchers also looked at what happened to an N.B.A. player's output when his pay rank changed (either through a trade or a new salary). In cases where a player went from a high ranking to a low ranking, his output dropped by about 16 percent. The opposite move had a much smaller positive impact. Still, it appears that, at the top of the pay scale, player performance did improve as pay rose.

But overall, the researchers say that envy trumps ambition: the negative impact of relative position outweighed the positive effects of pay incentives.

It's hard to argue, however, that the finding could be applied broadly to more conventional working environments. In the N.B.A., for example, players know how much their teammates make. If you don't know your colleague's salary, you'd be much less likely to change your effort. And the relatively higher wages professional athletes make may give them more of a cushion to slack off. Someone making 5-figures is more likely to be concerned with things like food and shelter than a player making $1 million per year.

Still, in places where an employee's output is more visible and is directly linked to his pay (like sales or asset management), incentive pay arrangements may be causing more harm than employers realize.