Illustration: Patrick Mariathasan for Harvard Business Manager
What is the ideal salary?? Even if funds were unlimited, it would be difficult to determine the ideal salary. The first intuition is that the higher the salary, the better the work results. But studies show that the relationship between compensation, motivation and performance is much more complex. In fact, evidence suggests that people would not be happier with their jobs if they could decide for themselves how much they want to be paid.
Even the researchers who emphasize motivational effects of money concede that salary and wages alone are not enough. The crucial questions are: Do we feel more comfortable in our jobs when we earn more? Or can a higher salary even demotivate us?
is an internationally recognized expert in personality profiling and psychometrics. He is a professor of business psychology at University College London (UCL) and vice president of research and innovation at Hogan Assessment Systems. He previously taught at the London School of Economics as well as New York University. He is the co-founder of Metaprofiling.com.
Let’s deal first with the question of whether people with higher salaries are more engaged. The most compelling answer comes from a meta-analysis by Tim Judge and colleagues. The authors included 120 years of research and analyzed a total of 92 quantitative studies. The entire data set consisted of over 15.000 people and 115 correlation coefficients.
The results suggest that the relationship between salary and satisfaction is very weak. The correlation found in the study suggests that there is only less than a 2 percent overlap between job satisfaction and salary. Moreover, the correlation between salary and salary satisfaction was only marginally higher: it was 4.8 percent. This suggests that people’s satisfaction with their salary is almost completely independent of their actual salary level.
To this end, a cross-cultural comparison showed that the observed correlation between salary and job satisfaction and salary applies pretty much everywhere. For example, there is little difference in this aspect between the U.S., India, the U.K. or Taiwan.
A similar pattern emerged when the authors compared different income brackets: "For workers in our data set who are in the top half of income earners, we found similar levels of job satisfaction to workers in the bottom half" (S.162 of the study). This is consistent with the findings of Gallup’s engagement study, which found no significant differences in employee motivation between different salary levels. The Gallup study is based on data from 1.4 million workers from 192 companies and organizations in 49 different industries and 34 countries.
These findings have important implications for management: if we want engaged employees, more pay is clearly not the best answer. More money does not automatically mean that people are more satisfied with their salaries. In short, we can’t buy engagement with money.
Can money demotivate?
But this doesn’t answer our second important question: can money also demotivate us? Some scientists are of this opinion. They argue that there is a natural tension between intrinsic and extrinsic motivation. According to this, financial rewards could dampen or even displace intrinsic motives (such as enjoyment, inquisitiveness, learning, or personal challenge).
Despite the mass of laboratory experiments designed to test this hypothesis – also known as the corrupting effect – there is still no consensus on the intensity with which higher pay might demotivate. However, two of these studies are particularly interesting.
The first is a landmark meta-analysis by Edward Deci and his colleagues. The authors pooled the results of a total of 128 controlled experiments. Results show consistent negative effects of rewards – from candy to money – on intrinsic motivation. These effects were particularly strong when the tasks were interesting and enjoyable rather than boring and trivial.
To be more specific: For every unit of additional reward, intrinsic motivation drops by about 25 percent. When these rewards are material and calculable (i.e., when individuals know in advance how much money they will receive in addition to their salary), intrinsic motivation drops by as much as 36 percent.
Important to note: Some researchers believe that extrinsic rewards – such as money – can actually increase intrinsic motivation in uninteresting activities. One example is the meta-analysis by Judy Cameron and colleagues.
Not so with creative activities: Here, Deci et al. conclude that "strategies that focus on extrinsic incentives risk diminishing intrinsic motivation rather than enhancing it." (S.659).
The second study is a recent study by Yoon Jik Cho and James Perry. The authors analyzed real-world data from a representative sample of more than 200.000 employees from the public sector in the USA. The results showed that the level of motivation was three times more strongly linked to intrinsic motives than to extrinsic motives. Both motives tended to be mutually exclusive. In other words, for employees who have little interest in extrinsic rewards, intrinsic motives play a large role in their commitment. In contrast, when employees are focused on extrinsic incentives, the effects of intrinsic motives on engagement fade significantly. Employees who are intrinsically motivated are about three times more engaged than those who are driven by extrinsic incentives such as money.
Basically, it’s simple: you will like your job if you value the activity itself and money is not the most important reason for your choice. This relationship persisted even in low-paying jobs. This fits with the findings of the Gallup study and the research by Judge and his colleagues: there is no correlation between employee engagement and income level.
Skeptics may ask if this doesn’t just show the following correlation: That people who don’t like their jobs are only thinking about the money associated with them. This thesis is difficult to test. Of course, this could be a reason. Another might be that people who focus too much on the money prevent themselves from liking their jobs.
Malleable mindsets
This study also raises another question: Can employees rid themselves of this mindset that focuses on the money and is detrimental to engagement? Or is it an innate way of thinking: Do extrinsic motives simply play a bigger role in some people, while others are more focused on the real goal? We do not know.
I think it behaves like this: which motives predominate is determined by whether our interests and skills match our jobs. Theoretically, mindsets are malleable; the human brain is remarkably flexible. We can try to teach people to focus on the task at hand and find positive aspects to it, rather than focusing on the consequences (or rewards) for completing the task. Because then they would perceive the task as far more enjoyable. It’s also much more motivating to go running because it’s fun. And not because I want to get fit or lose weight.
Intrinsic motivation is also a much better indicator of job performance than extrinsic motivation. Higher financial rewards affect intrinsic motivation as well as job performance. The more people focus on their paychecks, the less they care about satisfying their intellectual curiosity and learning new skills. These things are critical to helping people deliver their best possible performance.
So there’s little evidence that money motivates people. On the other hand, there is some evidence that money, on the contrary, demotivates us. This speaks to the proposition that there may be hidden costs associated with rewards. Of course, this does not mean that we should work for free. Of course, we all have to pay our bills and provide for our families. But once these basic things are covered, the psychological benefits of money are questionable. In an oft-cited study, Daniel Kahnemann and Angus Deaton argue that the emotional well-being of U.S. workers increased with higher income levels, up to a level of 75.000 US dollars a year. After that, a higher income no longer had an increasing effect on well-being. Arnold Schwarzenegger once said, "Money doesn’t make you happy. I now own $50 million, but I was just as happy when I had $48 million."
Individual relationship
But this is not true for all people. Our relationship with money is very special. In fact, in this age of personalization, when most things can be customized to our needs – from social media news feeds, potential partners in online dating, superimposed items in online shopping, or playlists for music – it’s quite surprising that reward systems still work on the premise: What works for the masses also works for the individual.
Money is not just a transactional tool. It is a psychological symbol, and its meaning is highly subjective. For example, there are significant differences in how people think or worry about money. People value money for a variety of reasons (for example, as a necessary means to power, freedom, security, or love). If companies really want to motivate their employees, they need to understand what their employees actually value. The answer is: you need to treat each employee individually. Studies show that different values affect employee engagement in different ways. For example, achieving income goals based on striving for power, narcissism or overcoming self-doubt is less satisfying than those based on striving for security, family support or free time. Maybe it’s time to stop paying people for what they know or do. But as they want it to be.
Forget praise, forget punishment, forget money. To really motivate your team, you need to make work more interesting. How excellent bosses motivate, how trust boosts performance, and why the right company goal increases motivation.
Other studies show that workers’ personalities are much better predictors of their engagement than, say, their salaries. The most compelling research in this field is a large meta-analysis with a total of 25.000 participants. In this study, the authors show that personality accounted for 40 percent of the variance in job satisfaction ratings. The more emotionally stable, outgoing, sociable, and conscientious people are, the more they tend to like their jobs (regardless of the level of their income). But the personality of employees is not the most important determinant when it comes to the level of engagement. In fact, the most important cause of unmotivated employees in companies is poor leadership. So managers have a special responsibility: their personality will have a big influence on whether their employees are motivated or not.