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, new 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 October in the ILR Review, 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.
Eilene Zimmerman has written extensively about entrepreneurship, technology, small businesses and the workplace, and is a regular contributor to the New York Times business section. This piece was originally published by the Stanford Graduate School of Business and has been reprinted with permission. Follow the school on Twitter at @StanfordBiz.