Success at Work Is Warped by Your Co-Workers’ Salaries


Like most people with regular jobs that don’t require wearing skates to work, professional hockey players had no idea how much money their colleagues made—until one morning in 1990 when a newspaper published the salary of everyone in the National Hockey League.

It was an extreme case of a topic that captivates economists: pay transparency.

So not long ago, intrigued by the consequences of that overnight shock, a researcher decided to exploit this natural experiment hiding in plain sight. It led to insights that have never been so relevant about how one industry’s wage disclosure affected the performance of those employees and their entire teams.

Now a version of what happened in hockey is on the verge of happening across the U.S.

The country is nearing a crossroads in the battle over salary transparency that would bring major changes to some of the nation’s most powerful companies from Wall Street to Silicon Valley.

A small number of states already have wage-disclosure laws that require most workplaces to list pay ranges on their job postings. These policies meant to narrow gender pay gaps could become more common, as New York City is set to enact sweeping legislation in November and California sent a bill to the governor’s desk for a decision by the end of September. Talking about money in the office used to be taboo. But younger workers are more comfortable discussing how much they make, a phenomenon their older colleagues find as befuddling as TikTok.

As it turns out, there are hidden effects of pay transparency that warp the way people view success, and that’s why hockey’s unplanned experiment is worth another look today: We could all learn a thing or two from a few hundred people a few decades ago.

That moment of mass disclosure in the NHL is the focus of a new paper by

James Flynn,

an economics Ph.D. candidate at the University of Colorado. Plenty of studies have shown that salary transparency affects employee satisfaction. This one measures their production.

The employees who discovered they were paid less than their peers didn’t suddenly put in less effort at work. They just exerted a different kind of effort.

In a likely response to what they perceived as unfair pay, these NHL players sacrificed defense and shifted their attention to offense, since players who were better at offense commanded higher salaries in contract negotiations. They had seen the skills their labor market rewarded—and they were following the money. But this was counterproductive. The performance of their teams suffered when they altered their individual play.

It’s not hard to see how those findings generalize to any business.

Underpaid NHL players began scoring more goals, but their teams performed worse overall.

That hockey player putting offense ahead of defense could be a salesperson being paid to boost short-term commissions instead of building long-term relationships, or a teacher getting a bonus for improving test scores rather than inspiring students. When people feel undervalued, they prioritize the flashier parts of their jobs that are easier to measure, even at the risk of costing their organizations.

This behavioral change reflects a deeply human impulse. We want to be paid well, but we really want to be paid well relative to others. We care less about what we make than what we make in the context of our peers.

That’s one takeaway from the rich scientific literature about other people’s money, which includes two classic studies from places not exactly known for raging capitalism: Norway and Berkeley, Calif.

As soon as Norway made the tax records of its citizens accessible online in 2001, they couldn’t help but peek into the private financial lives of everyone they knew. There were times when “Norwegians were more interested in learning about others’ incomes than in watching videos on YouTube,” wrote Ricardo Perez-Truglia, an economist at the University of California, Berkeley’s business school. But that irresistible urge to compare incomes wasn’t healthy, according to his study, as greater pay transparency widened the happiness gap between Norway’s rich and poor.

The University of California’s employees had a similar response when they were shown how their salaries compared to the pay of their colleagues. The awareness had a negative effect on those who were underpaid relative to their peers but no effect on those who were paid well. In other words, these people already knew what they were paid, but what changed their minds was finding out what others were paid. The ones who learned they were paid less reported lower job satisfaction and a higher likelihood of seeking work elsewhere, according to a team of economists led by UC Berkeley professor

David Card,

last year’s Nobel Prize winner.

Those are radical examples, but they’re helpful context for understanding the transparency laws that would govern hiring at Google and

Goldman Sachs,

because they helped reveal how we process information about our pay. The same is true of hockey.

While hockey is an unusual labor market—employees are paid millions, their offices are sheets of ice, their colleagues tend to be missing teeth—it’s also useful for studying other workplaces.

Performance reviews are tricky and fraught with bias for most businesses. But in sports today, productivity is neatly quantified into statistics for anyone to scrutinize, and players’ incomes might as well be printed on their jerseys. One of the stranger parts of being a professional athlete is that colleagues, bosses and complete strangers often know your salary down to the dollar.

But it wasn’t always this way. NHL players followed other sports leagues in voting to make their salaries public, and they were preparing to release them in 1990 when they were scooped by the Montreal Gazette, which splashed a news article across the front page and printed the full list of NHL pay like a box score. Suddenly there were no more secrets.

The fateful morning Canadians awoke to learn NHL players’ salaries.



Photo:

Montreal Gazette/Postmedia Network Inc.

It’s what happened next that interested Mr. Flynn, the economist who learned of the NHL’s wage disclosure while listening to a podcast and turned his study into a recently published academic paper, which includes section headings like: “What is hockey?”

He was most fascinated by the players who abruptly found out they were paid less than their peers after the wage disclosure. Mr. Flynn wanted to know how they reacted to seeing their place in the league’s salary hierarchy—not how they felt, but how they behaved.

When he crunched the data, he noticed a paradox. The underpaid players began posting better individual stats after the NHL’s equivalent of wage transparency. They were also worse at helping their teams win games.

They took more shots and scored more goals, but that didn’t make them more productive. In fact, the opposite. When they were on the ice, their teams were outscored by a wider margin. They had changed their play at the expense of their colleagues.

It was as if simply knowing how the market valued talent made them want to be entirely different people at work. These players couldn’t resist the incentives “to produce whatever the boss is measuring and rewarding,” as Mr. Card wrote in an email, even if those bosses were measuring and rewarding the wrong numbers.

But wage disclosure helped make the market for hockey talent more efficient. In the 1990 season, team payroll had no correlation with team performance, according to Mr. Flynn’s research. Immediately after the 1990 season, money and success were forever linked.

Teams were ultimately hurt by underpaying players, he found, but they were not helped by overpaying them. That means the optimal strategy for companies is to pay employees precisely what they’re worth.

It’s a lesson that’s easy to forget but important to remember: No matter where they work, how much they make and who else knows, most people just want to be valued properly.

Write to Ben Cohen at ben.cohen@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Leave a Reply

Your email address will not be published.

%d bloggers like this: