Tuesday, 21 October 2008

Pay inequality – good or bad for team performance?

When you have a team of people working on a common task, who all fullfil a similar role in the team (like a football team, a string quartet, a team of engineers, etc.) should you pay them all pretty much the same, or would you be better off creating quite different levels of remuneration within the team?

This question can stir a fair bit of debate, and I have heard it been argued one way and the other. “You should pay them all the same” some loudly proclaim, “because they’re a team and you don’t want to create envy and inequality within the group!” Others will bellow in agony: “But you need to incentivize people – stupid!; equal pay kills their motivation; you should pay more to people who (seem to) contribute more, to keep them happy while stimulating the others to better themselves!!”.

And who knows whether it is one way or the other. The problem is, it is very difficult to research properly, and find a conclusive and reliable answer. You’d of course need information on the exact remuneration of all people in a team, their individual performance and their team performance, and have a whole bunch of identical teams to make meaningful comparisons. And that’s easier said than done.

Professor Matt Bloom, from the University of Notre Dame, decided to give it a try. And to make sure that he had a clean research sample, with a whole bunch of similar teams doing the same task, for which he could collect all the relevant info, he chose Major League Baseball.

And, although a bit unconventional, that’s perhaps not such a bad idea…! I don’t know much about baseball (and would prefer to keep it that way!) but I assume the rules are the same for everyone, the teams the same size, working on the same task, etc. Thus, Matt collected performance data on 1644 players in 29 teams, assessing their individual performance through batting runs, fielding runs, earned run averages, pitching runs, player ratings and all this (for me) abacadabra. For team performance, he measured a combination of on-field performance and financial performance, using game wins and revenue and valuation data. So, this gave him measures for team performance and the individual performance of each member of the team.

Then he measured player compensation; The newspaper USA Today apparently publishes salary and performance incentives for all players, so he used that. Finally, he created an indicator of “pay dispersion”, or how big are the differences in the levels of pay between the players on a team. Using this data, he computed whether clubs were better off equalising pay, or differentiating their team’s payment levels.

And, so it turned out, it’s the former: that is, baseball teams performed better if the salaries of the players were not too different from each other. The larger the payment differences, the lower the individual players’ performance; mostly so – perhaps not surprisingly – for the players receiving the lowest payment. But – perhaps more surprisingly – also the players who found themselves pretty high in the payment pecking order, receiving an above-avarege salary package, saw their individual performance being negatively affected by the pay dispersion within the team.

Finally, team performance: Those teams with high pay differences among players had markedly poorer performance. It seems substantial differences in pay are more of a de-motivator than an incentive, even for the majority of people who end up in the high payment bracket! And the team suffers from it as a result.

6 comments:

Wally Bock said...

This is actually a bad choice of sample in at least one way. Individual baseball players simply don't have the impact on the outcome of a season that an individual basketball or football (the kind most Americans call soccer) player. In those sports a player or two can have a big impact on team results.

Adam said...

But isn't the important thing here that each player knows that salary of other players? In the vast majority of companies, you have no idea what the rest of your team is earning. Or maybe the natural urge is to believe that everyone else is being paid more than you, and the baseball team effect holds anyway?

Christian Bieck said...

Wally,
baseball is a good sample exactly BECAUSE single players do not have an overly high impact on team performance. That's just the same as in most business teams - everyone matters, but not as much the "better" individuals like to believe... (everybody is replacable).

Do baseball players actually know what the others on the team earn?

Freek said...

There are two good & interesting points you bring up: 1) Baseball players may not have a much individual influence on the team result as in some other sports or situations. I agree this makes it a different situation, and that it is a valid point, but I am not sure why it would make it a bad setting to test & explore these things. If anything, as some of you already said, it may make it more in line with some business settings.

The second point has to do with transparency, or to what extent team members are aware of a) the existence of pay differences, and b) exactly who gets what. Business situations can also be very different in this respect. In some companies - like, apparently, in baseball - everybody pretty much knows each others pay, performance, bonus, etc. Other companies and professions are more secretive, probably to contain the "envy effect" a bit and curb demotivation. However, the tricky things is, if nobody knows that there are pay differences, it is also hard to imagine how one could get the alleged benefits (e.g. incentivation and increased motivation)! How can you be motivated by something you don't know about?!

Probably in most business situations people at least to some extent are aware of the existence of pay differences. And, even if you don't know exactly who gets what, this may be enough to trigger some of the negative effects, which could easily override the motivational benefits you're trying to achieve.

Wally Bock said...

Congratulations! This post was selected as one of the five best business blog posts of the week in my Three Star Leadership Midweek Review of the Business Blogs.

http://blog.threestarleadership.com/2008/10/22/102208-a-midweek-look-at-the-business-blogs.aspx

Wally Bock

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