How Much Does Your Boss Make? The Effects of Salary Comparisons (2016-17)

Ricardo Perez-Truglia, Assistant Professor of Global Economics and Management

Funding from the Center for Global Management was used to support the design and implementation of field experiments with firms in the developing world. One of these projects studies the effects of salary comparisons in the workplace. When setting salaries, firms face a dilemma. On the one hand, setting unequal wages can provide incentives for employees to work harder and enable employers to retain their most productive workers. On the other hand, unequal pay may destroy motivation if employees dislike inequality. Professor Ricardo Perez-Truglia and Professor Zoe Cullen of Harvard Business School conducted a series of field experiments designed to understand the causes and consequences of salary comparisons inside a large corporation. The funding from the Center for Global Management was used to hire a part-time research associate who assisted with data collection, cleaning and analysis and facilitating meetings with the cooperating institution.

The experiment was conducted with 2,060 employees from a multibillion-dollar corporation in Asia. In addition to rich survey data about the satisfaction and expectation of these employees, the researchers collected unique data on the employees’ behavior, such as their effort, their productivity and their progression in the company (e.g., whether they stay with the company, are promoted or transferred). The authors show that employees have large and systematic misperceptions about the salaries of their managers and their peers. Moreover, they show that perceptions about the salaries of other employees have significant causal effects on their behavior. Whereas believing that one’s peers are paid better reduces effort, performance and retention, believing that the managers are better paid increases these same outcomes.

Findings from this project are of great business and management relevance. The finding that employees are substantially averse to horizontal inequality but tolerant of vertical inequality goes against the widespread view that social comparisons force firms to compress the salaries between bosses and subordinates. Also, this evidence can explain why firms provide most of the incentives in the form of promotions. The second project supported by this same CGM award looked at how inflation expectations affect firm and customer decisions.

In 2017–18, the CGM is supporting Perez-Truglia’s global research into management practices, focused on firms located in Asia.