Myth Buster: Do Pay Increases Really Make Employees Work Harder?

I declare today as Human Resource Myth Buster Day on our blog. Each week, I’ll be taking up a new HR topic on common assumptions of employee behavior or needs that are found in practice. By digging a little deeper and looking to a variety of experts and research studies, HR professionals can challenge themselves (and their organizations) to apply such knowledge to effectively engage workers in their jobs, make incentives that work, develop office policies that do more help than harm, and so on.  

To begin, let’s discuss fact vs. fiction when it comes to pay raises and pay cuts. Is financial gain the simple equation to boosting productivity? According to recent experts in behavioral economics, pay and performance don’t have the perfect marriage.  

Henry Ford’s Efficiency Wages

The discussion could go further back into history for a better understanding. In 1918, Henry Ford discovered the revolutionary concept of “a higher paid worker means a more efficient worker.” He exceeded his competitors by offering $5 a day to prove the success of what became known as the “efficiency wages” model. It was a win-win scenario – not only was he able to boost productivity, but his business attracted the best of the best talent.  

Gift-Exchange Experiments

In an article by Slate Magazine, they featured one of many experiments to demonstrate the relationship between pay and productivity among employees.  For a position advertised at $12/hour, the first set of workers received $12/hour as expected while the second half was overpaid at $20/hour at the end. Some of the results showed that while productivity among the second group was higher in the first 90-minute period, it began to significantly lower with passing hours.  

Unfortunately, an inquiry into pay cuts or raises is not simple. In the economic downturn, many employers were faced with the choice of cutting wages versus laying off a few employees. Results have shown that in this type of major change, giving out the pink slip to a few workers is better on employee morale than cutting everyone’s pay. However, when considering general employee motivation following pay raises and other financial perks, the gift-exchange experiment challenges us to consider long-term results of the monetary incentive.  

If you’re interested in reading more about the behavioral economics studies, check out the Slate article.  

Also, look out for the second feature on the Weekly Myth Buster series for The Human Resource blog the same time next week. Comments and suggestions are welcome!

Image: Simon Howden / FreeDigitalPhotos.net

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