Articles
7 August 2019

Why (some) of your colleagues and boss are paid more than you

You are probably paid less than your boss, but it may not be because of the work he is doing or to keep him motivated. Instead, it is meant to motivate you and other potential successors. Some call this the worst argument ever for over-paid managers – but economists call this tournament theory

070819-image-race-team-competition.jpg
Source: Shutterstock

Competition has ruled workplace payment and reward structures for a long time. In economics, this is called tournament theory – the idea of paying people based on their relative position in a company, rather than their absolute level of output. This reward of higher pay (usually) incentivises all workers to raise their game. While nice in theory, its practice has caught much criticism over the years.

The idea has been around since the late 1970s when two economists suggested that a workplace compensation scheme based on an individual's relative position in a firm was the best way of allocating pay, rather than for just being good at their job. One reason this happens is that it is difficult to calculate what earnings should really be, it's much easier to say Jack is better than Jill.

It is difficult to calculate what earnings should really be, it's much easier to say Jack is better than Jill

However, there is a caveat. Employees who are lower down on the career ladder will only be motivated by “tournaments” if they see a realistic chance of winning. Within large companies, moving up the ladder, especially with substantial pay rises, will often be the exception rather than the rule.

Unwelcome features

Tournament-based pay can be a double-edged sword as the practice could be used to justify unfair payment structures and get in the way of teamwork as employees are judged on individual performance, potentially leading to a desire to outshine rather than aid co-workers.

That’s not to say tournaments can’t or shouldn’t have a place in the modern workplace. A 2019 report covered the topic of gamification at work, where rewards were given more frequently based on, for instance, tasks completed or work well done, rather than a one-off bonus per year. Results showed employees were more engaged and productive in this environment. This type of “tournament” could shift reward schemes away from an employee’s relative position and has room to include group rewards to stimulate collaboration.

More than just money

But some research suggests, the phenomenon was never properly tested and often used as a way to justify unfair salaries and compensation distribution.

Experts have also suggested that traditional tournament theory, aimed purely at monetary incentives may work well in the abstract, but has a number of weaknesses for running a company employee reward scheme in modern workplaces. While people might still strive for the status that comes with being rewarded, this isn’t necessarily linked to monetary rewards. Experts point out that people value other rewards such as health insurance and a better work-life balance more than purely monetary rewards and these perks often turn out to be of lower cost than increasing salaries.

The competitive nature of tournament theory could conflict with the twenty-first century workplace, which is often built around teamwork.

Moreover, the competitive nature of tournament theory could conflict with the modern workplace, which is often built around teamwork and gravitates more and more towards collaborative performance and away from striving for individual excellence. This is contrary to tournament theory which evaluates individual performance.

This could mean that tournament theory’s days are limited in its current form and that it may have to be adapted. The latter might seem more realistic, as competition is fairly deeply embedded in human nature.

All in a game

One solution to rewarding collaboration and creating employee engagement could be gamification.

A 2019 report showed that employees enjoyed receiving rewards, but favoured unexpected rewards (35%). Thirty-eight percent said that working towards more salient rewards and bonuses would make work more fun. Annual bonus structures might often seem too far off to really care about throughout the year as people tend to discount benefits further in the future and value more immediate benefits more.

Gamification doesn’t have to revolve around an individual’s work, but opens the field to team rewards to increase collaboration

While gamification in this report is viewed more from the perspective of engaging employees and increasing productivity, it could also be the next step for tournament theory, moving it away from deciding on rewards based on someone’s relative position and more towards their output. Additionally, gamification doesn’t have to revolve around an individual’s work but opens the field to team rewards to increase collaboration and helping co-workers to be successful alongside an individual’s own success.

Revision of reward schemes like gamification could be an important step forward either through a departure from (certain principles of) tournament theory, an adaptation of it, or a mix of the two.


Disclaimer

"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.

This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.

The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.

Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.

ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).