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Every piece of knowledge has a story behind it. I was privy to the story behind this piece of research, and I think it illustrates perfectly why it is useful to managers everywhere (This will not be exactly correct, but the gist is, I believe, correct).
Two professors of business management were having lunch with a high level university administrator. The administrator was in control of a chunk of money that was to be used for raises, but was having a hard time figuring out how to disperse it. One option was just to give a slight increase to all the professors in the university. The other option was to use it as a bonus incentive for the top researchers. The professors and the administrator talked numbers. They realized that only giving the top researchers at the university the money would increase each of those professors’ salary by about 4%. The two business professors said it was not enough of an increase to motivate the researchers.
The administrator said okay, but wanted to know how big a pay increase would be needed to motivate people to do better as professors.
The professors admitted they did not know. But since they were good researchers they decided to find out.
So they got a graduate student on board (because that is the graduate students’ lot in life, to do the grunt work for others) and a study was designed.
Undergraduate students were used as the subjects (the university undergraduate is the most studied animal on the planet, even more so than fruit flies). The students were given a job grading multiple choice tests (this was before computers and scanners were everywhere and this was a real job that undergrads often did). Then they gave them pay increases, at differing levels and had them work some more. Then they asked them about their raises.
Was the raise meaningful to them? Did they really even notice they had gotten a raise? Did the raise make them work harder?
They found that too low a raise and the students said they worked less hard. At this level no raise would have been better. At around 7% of base pay the students started saying that the raise made them work harder – that they noticed the raise, appreciated it and were motivated by it.
7% is in general agreement with other research that had been done on this question, and while may not be the right percentage for executive levels, it is probably a good rule of thumb for most employees.
So, the next time you have some money to use as an increase in salary for your employees and you want to reward and motivate your top performers, you need to make sure that the increase that you are giving them is above 7%. Much less and they may get resentful, giving you a negative return on your money. Two or three percent is fine for a cost of living increase, but not in recognition of performance.
7% is the absolute minimum, it is the level at which someone says to his/herself that they should work slightly harder. Giving more makes people (at least in the short run) think about working even harder. Raises are not a piker’s game; you cannot give someone a nickel and expect them become model employees. Thrift has its place, that place is not in raises and bonuses that are intended to be a motivator.
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September 1, 2009 12:47 pm
This is really interesting. I like reading studies like this and as I'm still in the beginning stages of my 'career' there have come times when my annual review is set, or I'm asking for a raise and I wish I was a little more equipped. Often I talk to my friends who have been 'around the block,' my parents, or converse with my peers here :)
I will be keeping the 7% in mind. It is a good number to shoot for, thanks!
September 1, 2009 2:24 pm
Aaron, I think this is a fantastic study and want to thank you for the story you have behind it. I've been working on incentive programs within the education sector and this seems to really relate. I think everyone can relate to the idea of incentives and their role within an organization. I should ask, did the students know the raise amount for each other? I could see that causing significant tension in the office, causing problems for everyone.
September 1, 2009 2:32 pm
I think you could say we do not want charity but the proper recognition of our work (or potential). Depending on how much on earns, 7% may not even cut it. And you have to keep in mind inflation which is what these raises are usually covering.
September 1, 2009 3:33 pm
Good Gracious. No wonder government professionals have the lowest morale and are known for having low productivity.
When I worked in local government, having performance reviews was mandatory. I told them very seriously because I wanted to improve. At the end of each review, my boss (bless her heart) would say " Even though you've done well, you know this has no effect of an annual increase". And I would get a little sad because, let's face it, getting a raise is how organizations tell good employees that they are doing a great job. Getting more responsiblity works (and my boss did that), public praise works too (she did that, too) but every month when I looked at my pay stubs, I reminded myself that I was destined for bigger things.
And during the "years of plenty" we would at most get 3-5%, which according to your blog wasn't enough. And based on all the negativity I would hear from my co-workers, all long-timers, who thought they should have been making more....
they felt just as crappy whether they got a small raise or nothing at all.
And let's be real, a good raise has to be one that has an effect of your take home pay. All the raises I've ever gotten (in the public sector) haven't even made a a noticeable difference in my net salary.
September 1, 2009 4:14 pm
I'm curious if this is related to the 5% standard. If we expect 5%/year from most any company we work for, are we then geared to want 2% more from another company to work harder?
Love the paranthetical vignettes btw. Lol.
September 1, 2009 5:35 pm
@Grace - Shoot for the stars, from what I've read, one of the biggest things that keeps women (of all ages) from getting raises is not asking for them. Also, times when you help out fellow co-workers has a large affect on your business' bottom line, so hopefully you can use that as another tool in your belt.
@Josh - The students were specifically kept from comparing the sizes of their raises to take equity considerations out of the study. Equity and comparison issues, though, are very interesting (and thorny).
@Giovanni - I think you are exactly right, that people want to be recognized for their work & that is the psychology behind the findings of this study. However, this study (& the 7% threshold) are in regards to performance raises, not cost of living raises - which should be given to everyone.
@Monica - Great story (though a little depressing). I hope you've moved on to the bigger and better things you deserve.
@Akshay - I had not heard of the 5% standard, but for an average cost-of-living increase it sounds about right (if a little high right now). And, yeah, if that is your standard for a regular cost-of-living increase, then I think you would expect more for a performance increase.
Also, I'm definitely still trying to find my voice as a blogger, and it's good to know that you like my asides, thanks.
September 2, 2009 4:17 pm
It sounds like this article is stating that, if businesses give raises, they better be more than 7%. This could be justification for business not giving ANY raises at all.
The question that pops up for me is this: How does a busines justify giving raises to some people when it goes through multiple rounds of layoffs, due to income plummeting?
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Grad School Zone
UVA (Darden) MBA Admissions Deadlines for 2010-2011
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The University of Virginia's Darden School of Business recently published its application deadlines for the coming admissions season. Here they are, followed by our comments in italics:
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