Research by Stanford’s Jeffrey Pfeffer Shows the Addictive Power of Money
Stanford Graduate School of Business
January 9, 2014 9:00 AM
STANFORD, Calif.--(BUSINESS WIRE)--
The importance
we place on money affects our lives in myriad ways, from where we live
to the kind of job we choose to the amount of time we spend on work or
leisure. Conventional wisdom — as well as economic theory — says the
more of something we have, the less of it we want, but that’s not the
case with money, where more is rarely enough.
Now, research from Jeffrey Pfeffer, a professor of organizational behavior at Stanford Graduate School of Business,
may shed some light on why money can be addictive and how that
addiction may be contributing to increasingly high CEO compensation
packages. The paper “When Does Money Make Money More Important?”
shows that money earned through labor is more important to people than
money that comes from other sources (such as investments or a winning
lottery ticket). And the more money paid for each hour of work, the
more important that money becomes.
The paper, published in the ILRReview, is the result of research Pfeffer did with Sanford E. DeVoe, an associate professor at the University of Toronto’s Rotman School of Management, and Byron Y. Lee,
an assistant professor at Renmin Business School, Renmin University of
China. It was inspired by a quote from Daniel Vasella, the former CEO
of Swiss pharmaceutical giant Novartis AG, who declined a $78 million
severance package last February after a public backlash over it. In a 2002 interview with Fortune magazine,
Vasella said: “The strange part is, the more I made, the more I got
preoccupied with money. When suddenly I didn’t have to think about
money as much, I found myself starting to think increasingly about it.”
Pfeffer saw that quote again a few years ago, and it got him
and his research colleagues thinking that not only does money have an
ability to fulfill real needs — such as buying food, shelter, and
clothing — but also it signals worth and competence. People generally
believe their pay level communicates how much an organization values
them. “It occurred to us that it was quite possible money operated
differently than other things we acquire, and that the more money you
had, the more important it became,” he says.
To test their theory, the researchers examined the effect of changes in
the amount of money received on changes in the importance of money
over time. They relied on the British Household Panel Survey, a
longitudinal survey from 1991-2009, that asked, among other questions,
how important “having a lot of money” was on a scale of 1 to 10, with
10 being “very important.” Pfeffer and his colleagues calculated an
estimated hourly wage rate, assuming that if money signaled someone’s
value, that signal would be best observed in the income earned per
hour. They also analyzed non-labor-related sources of money, such as
rent, savings, and investments, as a contrast to money received from an
employer.
The analysis
showed that the higher the hourly rate of labor income, the more
importance the person placed on money. The same was not true for money
received through other sources.
In a second study, 71 students from a large Canadian university were
shown how to make origami paper planes and given five minutes to make as
many as they could. Each participant received an evaluation sheet that
gave them a “very good” rating on both quality and quantity, and then
received an envelope containing either $1 or $10. Some participants
were told they had received the money randomly; others were told they
received it based on their work. Afterwards, participants were asked
questions about how valuable money was to them. The results showed that
people receiving the money randomly, no matter the amount, didn’t
differ in their rating of the importance of money. But those who
received an extra $10 for the quality of their work rated money as
significantly more important than those participants who received an
extra $1 based on work quality.
The third study involved 41
students from a large Canadian university, also asked to make the paper
airplanes. They were all paid $10 afterwards, but some were told it
was based on the quantity and quality of their planes, while others
were told the payment was random. Those who believed they received money based on the quality of their work subsequently created significantly more planes than those who believed the money was randomly awarded.
Pfeffer
said the three studies make one point: Money that comes from the work
we do makes that money more important to us. “The money in that case is
a signal of competence and worth, and that makes it addictive, because
the more you have, the more you want,” he says. Understanding that
might help explain why increasing numbers of top executives are
receiving outsize compensation packages. “No one wants to be paid below
the median because everybody thinks they are above average,” says
Pfeffer. “There’s a compensation rat race going on, but the centerpiece
of the story is that the more money people get, the more salient that
money becomes.”
Although
Pfeffer doesn’t have a prescription for ending money addiction, he does
believe that if society really wanted to put an end to over-the-top
executive compensation, “We would do what we have done with other
addictive substances — tax it. That’s what public policy has done in
the past to restrict the use of legal drugs like alcohol and nicotine —
we tax them,” says Pfeffer. Taxing enormous compensation packages at a
higher rate would create a disincentive for the payouts and might slow
the compensation rat race.
This research also has implications for rank-and-file compensation.
Because companies generally reward good employee performance with money,
that money “becomes equivalent to the love of the organization,” says
Pfeffer, and it will never be enough because it is so strongly
connected to people’s feelings of self-esteem and self worth.
“Companies should try to find other ways to signal competence and
worthiness to their employees,” he says, such as helping them find
purpose or meaning in the work itself, rather than the compensation.
The complete paper is available at: http://digitalcommons.ilr.cornell.edu/ilrreview/vol66/iss5/3/
Katie Pandes, 650-724-9152
pandes_katie@gsb.stanford.edu
http://finance.yahoo.com/news/research-stanford-jeffrey-pfeffer-shows-140000912.html
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