Salary Raise: more may be better but not always…

The fourth quarter keeps the HR and senior management busy with compensation and bonus decisions. Enormous amounts of time, energy and money, are rightfully spent on ensuring fair and competitive pay. Compensation decisions are tricky and subjective, and employee reactions can vary from emotional outpourings to thoughtful silences.

I want to reflect on money from a behavioural and psychological perspective. Here are some key insights from the loads of research on money and happiness.

We quickly adapt to higher income and all the things it can buy

We are adaptable creatures, and that is why, we are never fully satisfied even if good fortune comes our way. Of course, a new swanky car gives us thrill and enjoyment, but soon we get used to it. Psychologists call this phenomenon ‘happiness adaptation’ — human tendency to quickly return to a relatively stable level of happiness, despite major positive or negative events. Psychologists often refer to happiness adaptation as the ‘hedonic treadmill’ because we always end up where we started. Research has repeatedly proved that people who win lotteries return to roughly their original levels of happiness after the novelty has worn off.

It is not ‘absolute wealth’ but the ‘relative wealth’ that is linked to happiness.

We endlessly compare ourselves with others — the people we work with, our peers, people we grew up with, that is, our friends and classmates. Researchers have found that it’s not the absolute wealth that is linked to happiness, but the relative wealth and status. We are happy with our salary raise only until we find out that our peer received a higher salary raise.

Comparisons can drive us to improve ourselves, and that can be a very good thing. However, there can be drawbacks too. Such comparisons can result in a negative vortex, often pushing us to make emotion-based decisions in the heat of the moment.

Income has a positive relationship with happiness, but it is not a straight line.  

We’re never satisfied. We earnestly believe that if we had a little bit more money, we’d be happier. “But when we get there, we’re not,” says Catherine Sanderson, a psychology professor at Amherst College. The impact of additional income is greatest among those who have little money, but it does not stop mattering even after the income improves significantly. Nevertheless, according to 80000 hours.org, doubling of income may make a person only about five per cent more happy than she/he is presently.

Your personal worldview of money matters

Researchers at the National Academy of Sciences, measured brain activity of research participants while drinking wine. Regions of the brain responsible for registering pleasure were more active when the wine was identified as expensive as opposed to inexpensive. The punch line: it was the same wine in both cases!

The conclusion is unmistakable. How we perceive rewards (wine in this case) determines our happiness. I’m not advocating that money is not important, but the research on money and happiness suggests that the way we think about ourselves and our world is the strongest factor in determining our happiness.

Some of us may not agree with these research findings, and some findings may even seem contradictory. Our own needs, viewpoints and experiences shape our relationship with money. One thing is clear though- money is not only about money, it carries a strong emotional valence.

Makarand Khatavkar, is an executive coach and holds an ICC from INSEAD.