Reflecting on the Money-Happiness Connection

When is happiness about how much you earn?

That is the question examined by Stanford Business School's Jeffrey Pfeffer and the University of Toronto's Sanford Devoe in their paper The Effect of Hourly Payment on the Money-Happiness Connection.

The authors set out to find whether the relationship between money and happiness can be influenced by organizational practices, such as being paid by the hour, which encourage people to evaluate the time they expend on the job in economic terms.  Their finding:  income is not correlated with happiness for salaried employees, but it is correlated with happiness for employees who are paid on an hourly basis.  And creating conditions which encourage non-hourly employees to make the connection between the their time and their pay (such as attempting to estimate their hourly wage or tracking their time) served to strengthen the income-happiness correlation.

So, having clear information about how our time on the job translates into compensation makes us more likely to consider our compensation when assessing our general well-being. 

What lessons do we as reward and HR professionals take from those findings?  Here are a few initial thoughts...

• For me (admittedly not a Ph.D.), I think the findings speak beyond simply the notion of being paid by the hour (or not) to the concept of clarity about how my overall efforts translate into my compensation. I venture a guess that we would find a similar correlation between this kind of clarity and that correlation between income and happiness. I think this is one of the reasons that sales people reportedly have higher levels of engagement and career satisfaction; they are not paid by the hour, but they nonetheless tend to have compensation plans that make the connection between their efforts and their pay pretty darn clear.
• I think the findings also reinforce what we should already know about the importance of communication in compensation, particularly in the arena of incentive/variable pay. If we want employees to care about the incentive plans we put in place and change their behavior accordingly, we need to make the connection between their efforts and the ultimate payout as clear as possible. This is an information sharing, education and coaching thing. It means that our compensation plans, no matter how whiz-bang their design, are not likely to make a difference unless we invest time and resources in helping people see and understand the effort-award connection.

How about you?  What lessons or insights do you draw from these findings?  Share here, please!

Image: Creative Commons Photo "Happy Face" by Pink Moose

Comments

[Laura Schroeder]

I think another thing to consider is the company's point of view, especially when it comes to collaboration. For example, if salaried workers spend a significant portion of their working hours in status meetings that sends a different financial signal to the executive team than if the same people are paid by the hour. This topic dovetails nicely with the greater discussion going on right now around contingent workforce.

[Ann Bares]

Laura:

Good point, and you're right ... some interesting implications here for contingent workers. Thanks for the thoughts!!

[Paul Hebert]

Question - is there any discussion in the data about the relative income level of the two audiences? The reason I ask is I recently saw a study that indicated that after about $60K in income, more money doesn't affect "happiness." Just curious if the hourly/salary issue is one of absolute or relative income and positional concern.

[Ann Bares]

Paul:

Good question. My review of the paper suggests that they did gather information on income level in at least one of the studies referenced, but it isn't discussed as a factor. Because the "hourly" population is noted to include occupations like software developer and IT specialist, I don't know how clearly delineated the two groups actually might have been on that variable. You might want to click through (the paper is available free to download) to see if you find anything that I've missed.

[E James (Jim) Brennan]

Suspect it's all about a perception of individual efficacy and personal line of sight feedback. Bet that hourly workers who can opt for or out of overtime at will can be as "happy" about their controllable compensation comfort level as straight-commissioned sales reps. Both classes experience parallel intrinsic satisfiers. It's not the cash, it's the control over the outcome. The money is simply the medium for keeping score.

Michael Milken didn't go over the top in the mid 1980s because he needed money, believe you me. I held his W-2 and never saw so many zeros in my life on the original where they had forgotten to add his generous nine-figure bonus. Cash was just the counter, not the motivation. Didn't make him happy in the end, either way.

Like so many things, beyond a certain threshold point, it's not the amount you earn that pleases your life but the way you can control your earnings that makes life pleasant.

[Ann Bares]

Jim-

I completely agree about the importance of a sense of control and understanding of earnings - that personal line of sight. Key to any kind of pay satisfaction - or program effectiveness. Thanks for weighing in!

[Timm]

I second Jim's comments - it's about the feeling of self-efficacy, a prerequisite for self-worth, one of the most important factors for happiness from a psychological point of view.

[Renaissance Clothing]

"If we want employees to care about the incentive plans we put in place and change their behavior accordingly, we need to make the connection between their efforts and the ultimate payout as clear as possible." I totally agree with this, this will help motivate the employees to do the job well and also would help the employer because the employees work for the employer.