Surprise raises are more effective than higher salaries from the start, study finds

November 4, 2013
(istockphoto)
(istockphoto)

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 offer a productivity boost on its own. However, when a raise was seen as a gift that had no strings attached, rather than part of the initial hiring package, it did prompt employees to work harder.

The study used oDesk, a global online network of freelancers, to hire 266 people to do data entry work for the experiment. Because oDesk gave the researchers information about past work history and what freelancers had been paid for previous assignments, 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 represented an improvement on what they'd made in the past. While that may sound unbelievably low, keep in mind the workers they recruited came from a global pool of candidates. (And of course, that the size of academic research budgets is not the same as a corporate balance sheet.)

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

What they found was that the second group worked harder than the third, even though the two were ultimately paid the same. The results showed a roughly 20 percent higher productivity rate for the group that got the surprise bonus than the two that were paid either $3 or $4 from the start. Productivity was even higher among employees who had the most experience—perhaps their experience allowed them to work faster, or they knew enough to be impressed by the surprise gift.

What does this mean for leaders? One of the researchers, HBS professor Deepak Malhotra, thinks managers should weigh not just what their employees should be paid but how they should be paid, carefully 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 people enough upfront, saving some of the budget for a later bonus could help 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. Rather than giving out bonuses as part of the annual review period, when good performers already expect a pay boost is coming their way, what if people were rewarded at the spur of the moment? Could the surprise factor lead not only to harder and better work from those who get a bonus and weren't expecting one, but to less disappointment among those for whom one never materialized?

Finally, in the study, the extra pay was presented as a gift, with no strings attached. What does that say about retention bonuses or restricted stock payments that force people to stay on for a period of time before the reward actually kicks in? It may get people to stick around, but at what productivity cost?

The study doesn't attempt to answer these questions, as the scope of its experiment was much smaller. But it's a good reminder that maybe not everything we think we know about how to motivate people is quite right.

Jena McGregor is a columnist for On Leadership.

Read also:

Why slackers still get bonuses

Don't hold your breath for a better salary

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Jena McGregor writes a daily column analyzing leadership in the news for the Washington Post’s On Leadership section.
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