Equity

Hello, it’s good to see you again. This week we’re talking about aligning rewards and behaviors. The motivation for this discussion is two fold. First by aligning rewards and behaviors, we can reinforce and encourage behaviors we wanna see on our teams. And by the same token, eliminate behaviors we don’t wanna see on our teams. Recall that incentives are some of the most powerful drivers of human behavior. And secondly, by aligning your words and behaviors, we can help people maintain high levels of motivation at work. Therefore enabling them to unlock their full potential. I would like for us to start a discussion of the alignment between rewards and behaviors with a notion of equity.

Consider the following question. What would you chose. A $1,000 bonus, but it is the largest in your team. Or a $2,000 bonus, but it is the smallest in your team.

Think about this question for a minute and make your selection.

Several years ago a Business Week conducted a similar survey of about 2500 professionals in middle management. And what they found is that 59% of the respondents chose the smaller level of reward, as long as it was the largest in their team. Now it seems completely irrational. Why would you forego a high level of compensation? But this result gives great insight into human behavior. To understand human motivation, it’s not sufficient to attend to absolute level of rewards. We also need to consider relative level of rewards, because we socially compare to others. And that notion of social comparison, is the fundamental principle that underlies the idea of equity.

I’ll show you a quick video that’s based on the research done by Frans de Waal and Sarah Brosnan on Capuchin monkeys. In this video, you will see monkeys perform a very simple task and get a piece of cucumber as a reward.

And monkeys are perfectly happy with the status quo. Perfectly content. Until they see that another monkey’s getting a grape for the exact same task. Let’s see what happens then.

As you can see, even monkeys reject inequity. The concept of equity was first introduced in 1963 by John Stacey Adams. He suggested that we compare the ratio of inputs to rewards for ourselves, to those of our peers. By inputs I mean time, effort we put in our work. Rewards could be monetary rewards such as your pay, or non-monetary rewards such as public recognition.

For me to stay motivated, what kind of a a mathematical sign would I like to see between these two ratios. Think about this for a minute.

If you believe the sign is less than, or equal, you’re on the right track. This makes me really happy, because what happens here is that I put in less time, less effort per unit of reward than my peers, or a comparable amount of time and effort per unit of reward. The situation turns unsatisfactory to me if the sign is greater than. Because in this case, I have to work harder than my peers per unit of rewards. Speaking of equity, consider that in 2014, the CEO of McDonald’s made about 1,000 times as much as the salary of an average worker in the company. This is not a typo.

In a particularly ironic twist, around the same time the company published the website, advising its employees how to survive on minimum wage. That advice included tips such as spending spending zero on heating and getting a second job. From an equity perspective, not necessarily the most effective way to motivate your workforce. McDonald’s situation is hardly unique. If you look at average CEO-to-worker compensation ratio across industries, you can see that it’s pretty high consistently. What’s particularly disturbing is that this ratio has been growing since the 1950’s. Some analysts report that if you look at SNP 500 companies, which are large cap companies traded on American Stock Exchanges.

The average CEO to worker compensation ratio for those companies, was about 20 to one in the 1950’s. Which means that an average CEO would make about 20 times the salary of an average worker in the 50s. This ratio has gone to 170 to 1 in recent years. And it is hard to make a compelling case of contemporary CEOs are eight times as productive, as our counterparts in the 50s.

It’s also interesting to recognize that our efforts to reduce income inequality, can often backfire if we don’t fully appreciate the notion of equity. The CEO of Gravity Payments, which is a credit card processing firm based in Seattle, Washington, raised the minimum salary at it’s company to $70,000 a year. He planned to implement this raise in about three years through a series of raises, the first of which was done in 2015. To go along with this initiative, he also slashed his own million dollar compensation package. Sounds like a wonderful idea. What can possibly go wrong? The intentions are wonderful. But the outcome of this initiative was that some of his top performing, most talented, most skilled employees left the firm.

Listen to what they’re saying. He gave raises to people who have the least skills, and are the least equipped to do the job. And the ones who were taking on the most, didn’t get as much of a bump. Now the people who were just clocking in and out were making the same as me. It shackles high performance to less motivated team members. Now that’s coming from a developer who left the company after having his salary raised from $41,000 to $50,000 a year. What happened here is, by raising the minimum salary and not changing much of the salary in the middle, they created salary compression.

Which led to perceptions of inequity by people who were the best performers, top-paid people historically, at gravity payments. The consequences of inequity are quite severe. As you could see from the example of gravity payments, inequity can lead to turnover, burnout. It can lead to stress. It can lead to negative affect, even coronary heart disease. There’s studies showing that if I find myself in a situation of inequity, I am two to four times as likely to develop hypertension and coronary heart disease. Absenteeism and theft at workplace are also consequences of inequity. Gerald Greenberg started a manufacturing facility where pay was temporarily cut by 15%. He found that rates of theft at the workplace increased by as much as 150%.

Now interestingly, you can look at the last two consequences of inequity, as people’s creative efforts to rectify inequity. By not coming to work, we reduce our inputs. And by stealing at workplace, we creatively increase our rewards. In terms of applying equity principle, I think the first step is to recognize that attending to absolute levels of compensation is not sufficient. We also need to consider relative levels of rewards, because we as human beings socially compare to our peers. If you suspect that there’s a situation of inequity developing in a workplace, it is also very important to attain congruence in perception of inputs. Because people can use a variety of inputs to construct equity ratios.

Those inputs can range from level of education, to years of experience on the job. And both these inputs can severely bias our perceptions of equity. For example, I might have a high level of education, but I can be new to the firm. And as a result of this, I can be not nearly as productive as someone who perhaps has a lower level of education, but knows the inner workings of the company. Years of experience is not a particularly informative metric either. We’ve all seen resumes where people claim they have ten years of experience.

But you start digging into this experience, and you realize that it’s more like one year of experience ten times over, so the person was doing the same job, the same task for ten straight years. Compared to someone who has fewer years of experience, but was exposed to the front office, the back office of the organization. With projects of different levels of scope and complexity. You also want to make sure that the inputs people site in constructing equity ratios, are relevant and important for the organization. For example, many people site effort as an input. In fact, many of the studies that I’ve shown you that documented negative consequences of inequity.

In those studies, people either implicitly or explicitly used effort as an input. Is that the most effective nominator for the equity ratio?

Not necessarily. How about looking at actual deliverable’s, at the actual work that you produce as a result of those efforts? But keep in mind that people often construct equity ratios using effort as an input simply because effort is more easily observable. I can see when you come in the office and when you leave. What you do behind closed doors is not that visible to me.

So if you feel like there’s a situation of inequity emerging at workplace, it’s really important to make sure that you reorient the conversation from effort as an input, to actual deliverable’s and actual work done. You also want to recognize the rewards that people value. Situations of inequity can arise because I’m rewarding you with things that you don’t really desire, you don’t really value or want. This is where the insights from week three of this course, about our needs and wants are especially important. You can be a stellar performer. And I can reward you with promotions and extra pay, but what could fail to recognize, is that you can have an ill-parented home, or a young child.

In which you would value is more time with your family, or perhaps working from home once in a while.

It’s really important to have lines of communication open, when you suspect that there could be temporary situations of inequity. In a study by Gerald Greenberg, where pay was temporarily cut by about 15% in a manufacturing facility. Those workers who received an adequate explanation of why this was happening, for them the rate of theft at workplace increased by about 60%. For those workers who did not receive an adequate explanation, theft went up by 160%. And finally strife or equity in the long term. What I mean by this is, it’s probably a futile effort to try to attain equity on a daily or monthly basis. Lots of things can get in the way.

For example, I might be asking you to lead and deliver on several projects. More so than I’m asking of other employees, simply because the projects that are coming into organization, are in your area of expertise. Or we’ve just hired a group of new people. And in addition to your daily responsibilities, I’m asking you to train and mentor those employees. But make sure and attend to equity ratios in the long run, by either adjusting rewards, or for example, giving extra help to your employees.