Management Futures: Don’t under-estimate pay

08 May 2014

In the current TV drama Happy Valley a finance manager denied a pay rise takes revenge by arranging for the kidnapping of the boss’s daughter. The shock of the event is magnified as it’s so grotesquely disproportionate, and the scriptwriters have to work hard to convince us of its plausibility by describing how the evil act was the culmination of years of envy and resentment. But could it be that pay envy is understood better by dramatists than by management theorists?

For decades, the conventional approach in business theories has been that pay is a so-called ‘hygiene’ factor – capable of demotivating, while only the more intrinsic matters such as interesting work and a motivational workplace can lead to fulfilment in one’s career.

This is based on the ground-breaking research of Frederick Herzberg in the 1950s. It was valuable research, but unfortunately the findings have become somewhat simplified, being turned into a rather rigid classification into hygiene and motivational elements, neglecting the interaction between the two. Herzberg was encouraging a deeper appreciation of all elements of what became known as ‘the psychological contract’. In plain language, this is: How well does your boss treat you? How fairly? How mutually reasonable is the deal between the hours and effort put in and the reward (defined broadly) offered in return?

It’s often true that a pay rise is insufficient to counter the effects of boring job content or an unpleasant boss. But there are two important caveats. Firstly, it may depend on the phase of the individual’s life: if you are mid-40s, with a hefty mortgage and four children, pay matters rather more than someone with zero borrowings and an empty nest.

Secondly, pay cannot be neatly segregated from other matters of the psychological contract. If your work is interesting and you like your colleagues, but you haven’t had a pay rise in five years while some under-performers elsewhere in the organisation take home many times more, it can begin to grate. Earnings are linked to self esteem and status in society, not least at a time of high house prices.

Moreover, when it comes to their own pay, senior executives employ a different theory; one which has led to huge increases in their remuneration in recent decades. This is known as ‘agency theory’. In this, the ‘agents’ of the shareholders (senior executives) have to be motivated by vast amounts of cash and share options in order to be incentivised to maximise financial returns. It doesn’t work, usually – there is considerable evidence that managing for all stakeholders improves performance in the round, including financial returns – but it has been the norm.

Not only is agency theory inconsistent with hygiene theory, it’s illogical. If anything, a pay rise is likely to be more motivational for a low earner than a high earner. The difference in quality of life between having zero holidays a year and one is far greater than the difference between three nice vacations and four.

It is an historic irony: the selective application of Herzberg’s theory has probably damaged the psychological contract. The answer is a fuller understanding of the interactions between pay and other elements of the unspoken contract.

Pay is not just money. Managers’ decisions about pay send unspoken messages. And as organisations begin to grow again over the coming year, staff and managers will all hope to share in the benefits. By all means negotiate when the opportunity arises – but leave the kidnap plots for TV shows. 

Submitted by Philip Wood

Read more opinions