Although few would deny that in any area of performance – sport, music, science, or business – there are salient individual differences in talent, we are generally less comfortable with the fact that some people get paid much more than others.
This is particularly striking when we compare individuals with similar backgrounds or age, operating in similar roles. However, it is still evident when we lament how much more executives or CEOs earn compared to the national average.
But if we accept that some people are much more talented than others, is it not hypocritical to complain about pay inequality? Are there any disadvantages in paying some employees much more than others? Perhaps more importantly, is it even possible to attract and retain top people without paying a premium for their talent? Here are five important considerations:
1. Stars want star treatment. Whether it’s money, freedom, power, or status, your most valuable employees will want to feel valued. Fairness is not treating everyone in the same way, but as they deserve. So long as you differentiate correctly, you should not be afraid to differentiate strongly.
2. Many organisations don’t know who their stars are. Most companies do a poor job at measuring performance, which results in even poorer measures of potential. In a perfect world the relationship between job performance and career success could be represented with a single Venn diagram. In the real world they are two circles that barely overlap. Why? Because those who evaluate talent rely too much on their intuition, and because the typical performance management process is contaminated by organisational politics.
3. Although money motivates, it does not satisfy. People have a very irrational relationship with money, which explains why the correlation between pay and job satisfaction is virtually zero. Even the correlation between pay and pay satisfaction is very low.
When we compare our performance with that of others we engage in self-serving biases that help us distort reality to feel better about ourselves: “I work much harder than he does”, or “what I do is much more important than what she does”. That said, pay still motivates, and most people would sacrifice a great deal for a little bit of extra money even if they don’t end up happier. It is also true that the effects of money wear off pretty quickly – people may spend years chasing a bonus or promotion but the effects of attaining it might last only a few days.
4. Big pay disparity harms team morale and performance. There is a problematic tension between what is good for the individual and what is good for the team. Pay some people a lot more than others and you may demoralise their teams. Research on NBA and baseball players shows that stars may perform better when they are paid much more than their teammates, but at the expense of overall team performance. By the same token, teams with more homogeneous remuneration are more united and more likely to perform as a unit.
5. You will never make everyone happy. Even if your pay philosophy is transparent, sensible, and data-driven it is impossible to please everyone. Some will always feel they are underpaid, and nobody will complain that they are overpaid.
You should probably spend time working out who your stars are, and once you do you should make sure that they feel appreciated. Or you can expect them to leave. While this solution is far from perfect the alternatives are probably worse.
Tomas Chamorro-Premuzic is professor of business psychology at University College London (UCL) and Columbia University
