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September 1, 2009

CONFOUNDING COMPARISONS

Lust, gluttony, greed, sloth, pride, wrath—six of the seven deadly sins. The one you should worry about most is No. 7 ... envy.

Jackson Nickerson, a business professor at Washington University in St. Louis, tells the story of a metals service center that promoted a new supervisor from the ranks of shop-floor workers. You wouldn’t think this would cause a problem. Promoting internal talent is a time-proven way to reward skill and service and to encourage other employees to learn, grow and earn promotions, too.

But instead, the new supervisor’s former buddies “did everything in their power to sabotage him,” says Nickerson. “Eventually, the owner had to let the guy go and hire a new supervisor from outside. That made the machine operators much happier. They didn’t sabotage that guy.”

Why the problem with the first pick? The answer, say Nickerson and fellow Washington University Professor Todd Zenger, is envy. In fact, they say, envy plays a powerful role in the ability of any company to grow, merge with or acquire another company, or even house in the same building employees from different departments, such as sales and operations.

“People will socially compare,” or evaluate their compensation, benefits and incentives “with those of their peers or superiors,” says Nickerson. “It’s part of human nature. The grass is greener on the other side, but you only know that if you compare your grass and their grass. Envy leads to social costs for the company. We have to recognize what these costs are and think about ways to mitigate them. You want to create policies, compensation structures and evaluations that encourage people to work harder and improve themselves, as opposed to bringing down the other guy.”

That’s far easier said than done. It requires planning, careful execution of mitigating programs and, sometimes, radical change because envy, far from being simply a personal issue, a sign of immaturity or a passing consequence of jealousy, proves to be as institutionally caustic as cancer.

“Most companies hit their limits because of this kind of problem,” Nickerson says. “It shapes what strategy they can follow. Social comparisons undermine the company either by imposing costs on it or forcing managers to adopt inefficient policies. We have to first recognize what these costs are, and then we have to think about another cost, the cost of mitigating the original problem.”

Nickerson and Zenger, as part of their research, crossed the academic borderline and reviewed findings of social scientists to find clues to the hidden workplace cost of envy. As sophisticated thinkers about organizational economics, the two continually study research about a common question for business schools—why companies are formed instead of simply relying upon the comparatively simple function of markets to respond to, or even create, supply and demand. Business researchers and most individuals recognize that there are some things that are better done by organizations that can marshal resources and create economies of scale in ways individuals and small groups cannot.

“If you’re an economist looking at social comparisons, you might say, what I need to do is offer the right wage and incentive to do the job, and that becomes part of the business cost equation,” says Nickerson. “But the other part is that people compare each other, and that creates emotions that we don’t like, such as anger. Remember, Jackie Gleason said that happiness is making $100 a month more than your brother-in-law.”

Aggrieved employees, who may in fact receive an extremely full compensation package, always have a choice when confronted with a negative social comparison. They can work harder, learn new skills or otherwise make themselves eligible for promotion or higher pay. But it may not be easy to get ahead at any particular company— promotions, for example, might be few and far between—so that leaves the employee with only two choices. “One is to leave, and the other is to impose costs on the organization, such as shirking, loafing, sabotage or, the most common, engaging in political influence and company politics,” says Nickerson. “The goal is not so much to raise my own salary, but to lower someone else’s. That might be couched in saying, ‘Hey, that’s not fair,’ about a situation. But remember, the concept of fairness comes out of social comparisons and, to some extent, envy.”

Nickerson and Zenger suggest that there are only three ways for employers to counter envy.

  • The first is to compress or level wages, so that if employees are doing much the same job, they are compensated, more or less, the same, even if crane operator Joe is far more productive than crane operator John. “So you always have to remember that in solving one problem by compressing wages, you create another, and that is that you lose incentives for people to work harder,” Nickerson says. “But by losing those incentives, you won’t incur the cost of envy.”
  • Second, some companies locate different groups of employees far away from one another so that information about pay and incentives becomes much more difficult to obtain. “If your salespeople drive to work in a Lexus or BMW, and the operations people are in Fords and GM vehicles, they can immediately observe that other people are compensated differently,” says Nickerson. “So one policy is to locate the sales center away from the service center so I can offer different incentives.” The down side is that there are benefits, in a metals service center or other businesses, to encouraging discussion between salespeople and operators and others which can be diminished or lost by separated locations. “But you may find it better to give up these efficiencies in order to reduce social comparisons,” says Nickerson.
  • Third, some companies avoid social comparison costs by outsourcing value-added functions. “If I have two different activities in a service center, such as unloading and stacking metal for one group and high-tech machine operations for another, I probably have to pay more for those machine operators,” says Nickerson. “I’m not going to give them the same incentives as people who operate simple machines, or who simply move metal. To put all those people under the same roof will lead to pressure on management to lower the salary of the machine operators, or raise the salary of the people who work around them. In a competitive environment, you don’t want those activities in the same company.”

To some business leaders, these issues are nonsense. In every work force, employees understand that skills, seniority and high-return occupations are more highly compensated than jobs that require less training, or employees who are new to the industry. “Research does show that people believe that if you are creating more value, you should get paid more,” says Nickerson. “But the question is, how much more?” He and Zenger found a study of secretaries at law firms and those employed by engineering firms. Controls on the research factored in such variables as age, experience, skills and special training. The secretaries at the law firms were paid much more than their equivalents in engineering. “Not because law firms theoretically have more money to pay people, but because secretaries at law firms compare themselves with law clerks, and law clerks compare themselves to attorneys, who make a lot more than engineers. Social comparisons cause the law secretary’s pay to be much higher,” says Nickerson.

In another study, a large chemical company invested in a new research-and-development center and hired Ph.D.-level scientists to staff it. The R&D center was located across the street from a chemical plant to facilitate real-world experiments. The scientists were expected to work late into the night, run major experiments and “be big thinkers,” says Nickerson. To facilitate creativity and to help them relax, the company provided the R&D staff with a ping-pong table.

Operations people began to take lunch at the R&D building’s superior cafeteria, saw the pingpong table and demanded one for themselves. “They asked, ‘Why are these R&D folks getting a ping-pong table when we are the ones working hard and making money for the company?’” says Nickerson. “The dispute went all the way to the CEO, even though everyone knew that there was really no place for a pingpong table in an operations environment, while it was appropriate for the R&D thought-leadership environment. The CEO’s solution: He removed the R&D ping-pong table, sending a strong negative signal to his best thinkers.

The next research step will be to examine more closely social comparisons in mergers and acquisitions. Large companies that acquire successful, entrepreneurial smaller ones usually impose compensation and incentive structures on their new business units. “So they lose the best help,” says Nickerson, who says the next study will seek policies to make M&A more successful.


Drs. Nickerson and Zenger are members of the faculty for Strategic Metals Management, a course of study for managers bound for senior executive management positions offered in partnership with the Metals Service Center Institute. Their paper, “Envy, Comparison Costs and the Economic Theory of the Firm,” appeared in a 2008 issue of Strategic Management Journal and was recognized by the Olin Business School at Washington University in St. Louis, Missouri, as the research that year most likely to transform companies.