Paying people more than they expected, with no strings attached, can boost productivity by as much as 20%, a new study says.
FORTUNE — With compensation budgets still suffering a post-recession hangover, and the average U.S. salary hike hovering around 3% a year, compensation strategy has become a hot topic. How do you design a pay plan that motivates people to do their best work? A new study by three Harvard Business School researchers suggests a novel answer: Shortly after you hire new workers, give them a raise.
“Previous research has shown that paying people more than they expect may elicit reciprocity in the form of greater productivity,” notes Deepak Malhotra, a Harvard business-administration professor who worked on the study. What he and his colleagues found, however, was that the connection between more pay and extra effort depends on presenting the increase “as a gift — that is, as something you’ve chosen to do purely as a nice gesture, with no strings attached.”
Malhotra and his team studied 266 people hired by oDesk, a global online network of freelancers, to do a one-time data-entry project for four hours. All of the new hires were people in developing countries, for whom hourly wages of $3 and $4 were higher than what they had been making in previous jobs.
The researchers split the group up into three parts. One group was told they would earn $3 an hour. A second group was initially hired at $3 an hour but, before they started working, they got a surprise: The budget for the project had expanded unexpectedly, they were told, and they would now be paid $4 an hour. The third group was offered $4 an hour from the start and given no increase.
Even though the second and third groups were ultimately paid the same amount, the second group worked harder and produced more — about 20% more — than either of the other two. People in the second group also showed the most stamina, maintaining their focus all the way through the assigned task and performing especially well toward the end of the four hours. Interestingly, the more experienced employees in the high-performing group were the most productive of all, apparently because their previous work experience led them to appreciate the rarity of an unexpected raise.
Contrary to conventional wisdom, Malhotra points out that higher pay, in and of itself, didn’t boost productivity: People who made $4 an hour from the outset worked no harder than those who were hired at $3 and were then paid $3.
To get the most impact from their pay plans, he adds, companies might consider not only what to pay new hires, but when to pay it.
“The key thing is how you present [the reason for an increase],” he says. Doling out extra money could boost productivity most “if you make it clear that the pay raise is something you’re choosing to do just because you can. Our theory is that people will reciprocate. If you do something nice, they’ll do something nice back.”