How Much Peers Are Paid Affects Employee Job Satisfaction

Do employees really care about what their peers earn? A German study examined the effect of the compensation level of comparable peers on the job satisfaction of managers in the chemicals industry over a five-year period and found that their job satisfaction levels were indeed affected by peer compensation, both in their own company and in the industry more broadly. The effects were found to differ across a number of key criteria, including gender and age. 

Key Topics: Social comparison; Job satisfaction; Compensation; Benchmarking

Title of Reviewed Article: Monetary Reference Points Of Managers – Empirical Evidence Of Status Quo Preferences And Social Comparisons
 
Researchers: Christian Grund and Johannes Martin (Aachen University).
 
Publication: Scottish Journal of Political Economy, 2017, Vol. 64 No. 1, pp. 70-87.
 
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Setting the Scene
 
Prior research suggests that employees view their compensation not purely in absolute terms but also in respect to how it ranks relative to chosen reference points (Grund & Sliwka, 2007; Tversky & Kahneman, 1991), and that when considering their job satisfaction, employees consider a number of compensation comparison reference points with similar others, both within their company and externally (Brown et al., 2008; Clark et al., 2009). When compensation falls below a certain level considered by employees to be fair, employees are likely to become dissatisfied and reduce effort (Ferrer-i-Carbonell, 2005; Luttmer, 2005).
 
The effect of peer compensation on job satisfaction has shown to be more pronounced when individual compensation is below reference points than above them, meaning that the decrease in job satisfaction when individuals perceive themselves to be unfairly paid is greater than the increase in job satisfaction when individuals perceive themselves to be fairly or more than fairly paid (Card et al., 2012; Ockenfels et al., 2015).
 
The findings of research on the impact of different reference points have been somewhat mixed (e.g. Clark & Senik, 2010). To further understand employee reaction to peer compensation, the current study examined the role of various types of peer groups in determining employee job satisfaction, and looked to answer a number of research questions:
 
Research question 1 - “To what extent is job satisfaction affected…by the difference between a person’s own wage and the wages of co-workers (social comparison)?”
 
Research question 2 – “Are there differences between comparisons on the firm level and on the industry level regarding the relevance of social comparisons?”
 
How the research was conducted
 
This study examined 4529 mid-level managers from 65 companies in the German chemical industry, with the majority of companies having more than 10,000 employees. All participants had university degrees in engineering or natural science.
 
Data was collected primarily from annual compensation surveys conducted in conjunction with the German Association of Employed Academics and Executives in the Chemical Industry (VAA).
 
Information from the 2009-2013 annual surveys was assessed. The surveys included retrospective data and as such the included data covered 2008-2002.
 
Information was collected in respect to compensation, job satisfaction, job level, socio-demographics, and company related data.
 
It was confirmed that VAA members (participant managers) have access to the annual survey results such that managers can view compensation related job and industry information. Furthermore, participating companies generally had transparent compensation structures that managers were aware of.
 
Based on the collected data, the researchers developed a model to test their research questions.
 
Key Research Findings
 
Average total compensation of participating managers was €128,000, with 80% of total compensation accounted for by fixed compensation, 16% by variable compensation, and 4% by other components such as LTI.
 
Job satisfaction was on average 7 out of a maximum of 11, with satisfaction levels remaining relatively stable over the period of the study.
 
Managers’ own total compensation was found to have a significant effect on job satisfaction.
 
The results indicated that compensation of similar managers acts as a monetary reference point for managers.
 
For women, only their own total compensation effected their job satisfaction, and not the compensation level of others. On the other hand, the job satisfaction of men was effected both by their own compensation and by the compensation of others in their own company as well as peers in their industry, with a higher ranking against peers leading to greater job satisfaction. This social comparison was found to be most significant for managers with a lower-than-average total compensation.
 
For managers with higher-than-average compensation, comparisons with peers in the same company were found to be most relevant for their job satisfaction, while comparisons with peers in other companies were more important to managers with lower-than-average compensation.
 
Social comparison was also found to be more relevant to younger managers, particularly in comparison to internal company peers.
 
Results Commentary
 
The results provide evidence that social comparison, both with peers in their own company and in other companies, plays an important role in the job satisfaction of managers. However, these findings differed between subgroups of managers, such as by gender, age, and compensation level.
 
Interestingly, while the compensation of peers, as well as their own, was important to men in determining their job satisfaction, women’s own compensation was only relevant for them.
 
Younger managers were found to be more sensitive to the compensation of others, suggesting that as they typically have more opportunities for career progression, they may see the compensation of others as a proxy for their future prospects.  
 
Managers with higher compensation levels were found to be more sensitive to the compensation of others in their own company, which may indicate that these individuals with higher compensation are potentially more competitive, and this competitiveness seeps into their view on their relative compensation level to close peers.
 
However, managers with lower-than-average compensation were more sensitive to compensation levels in other companies, suggesting that these managers viewed this outside compensation as a more tangible and realistic option in respect to changing roles, while those on higher compensation are likely to view moving to an external role as less viable given that there is less opportunity for them to move for a better compensated position.
 
Organizational and Reward Implications
 
The results of this study highlight the need for companies to carry out adequate benchmarking of jobs, taking account of both the internal and external markets. Not only does this allow companies to make better and more informed decisions in relation to the allocation of compensation to employees, but it also acknowledges the fact that employees will be doing their own (albeit less robust) research of their compensation levels against peers and making their own judgement as to the fairness of their compensation.
 
Where companies have a policy of paying at or above market rate for jobs and have robust structures in place to manage the equity of internal pay, they should consider educating employees in respect to the company’s compensation structure and benchmarking policy in order to better inform them as to the equity of the company’s approach, and in turn facilitate employees’ increased job satisfaction. 
 
Final Thoughts
 
The results of this study further reinforce the idea that employees care about how they are treated relative to others, and the level of compensation received by peers has a direct bearing on their own job satisfaction. It would be interesting to see future studies examine the effects of compensation perceptions on job satisfaction and other employment behaviour, such as performance, over a longer time frame.
 
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Source Article: Grund, C., & Martin, J. (2017). Monetary Reference Points Of Managers – Empirical Evidence Of Status Quo Preferences And Social Comparisons. Scottish Journal of Political Economy, 64(1), 70-87.
 
Published by: John Wiley & Sons, Inc.
 
For further details and access to the full journal article Click Here (subscription or payment may be required).
 
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References:

Brown, G. D., Gardner, J., Oswald, A. J., & Qian, J. (2008). Does wage rank affect employees’ well-being? Industrial Relations, 47(3), 355–389.
 
Card, D., Mas, A., Moretti, E., & Saez, E. (2012). Inequality at work: the effect of peer salaries on job satisfaction. American Economic Review, 102(6), 2981–3003.
 
Clark, A. E., & Senik, C. (2010). Who compares to whom? The Anatomy of Income Comparisons in Europe. Economic Journal, 120(544), 573–594.
 
Clark, A. E., Kristensen, N. & Westergard-Nielsen, N. (2009). Job satisfaction and co-worker wages: status or signal? Economic Journal, 119(536), 430–47.
 
Ferrer-i-Carbonell, A. (2005). Income and well-being: an empirical analysis of the comparison income effect. Journal of Public Economics, 89, 997–1019.
 
Grund, C. & Sliwka, D. (2007). Reference-dependent preferences and the impact of wage increases on job satisfaction: theory and evidence. Journal of Institutional and Theoretical Economics, 163(2), 313–335.
 
Luttmer, E. F. (2005). Neighbors as negatives: relative earnings and well-being. Quarterly Journal of Economics, 120(3), 963–1002.
 
Ockenfels, A., Sliwka, D. & Werner, P. (2015). Bonus payments and reference point violations. Management Science, 61, 1496–1513.
 
Tversky, A. & Kahneman, D. (1991). Loss aversion in riskless choice: a reference-dependent model. Quarterly Journal of Economics, 106(4), 1039–1061.