What puzzled me into writing this piece was the fascination lots of people have for fairness, the puzzle side of the topic being the lack of logic between two competing (in my opinion) wishes in business: performance and fairness. Managers want performance. Yet they take fairness directed actions that directly and inevocably negatively affect performance. Which says performance is nice, but fairness is a must. Hmmm…happy profits, then, what can i say…So yeah, studied the fairness thing a bit, trying to see if modifiers of definition might actually mitigate the conflict?
It would appear that humans are wired for fairness, which is seen as an enabler for cooperation – the secret sauce of the competitive success of the human race. Would that not be nice? 🙂 We are fair to each other, ergo, we cooperate? Well, apparently not…
The tribal human race, evidence shows, i.e. humans and kindred ape species, only respond to inequity when they routinely cooperate with those who are not related to them. Good find – it means we should not care for universal fairness (because nobody else will!) but for for fairness within pockets of people who routinely cooperate. No wonder agile methodologies work, duh!
Past utility models about fairness were built on altruism – the belief that people care about the wellbeing of others. This is occasionally the case, but not the rule. If you’re surprised, you’re either too young or have been living under a rock, reading romantic cheep novels. Science and empirical evidence point in the other direction, which is why the utility models are fading away.
Rabin fairness however postulated a utility function that incorporates fairness based on three facts:
- People are willing to sacrifice their own material well-being to help those who are being kind.
- People are willing to sacrifice their own material well-being to punish those who are being unkind.
- Both motivations 1 and 2 have a greater effect on behavior as the material cost of sacrificing becomes smaller.
…and we’re back to the tribal, interest-based fairness. Not bad.
Research on Inequity Aversion (resistance to inequitable outcomes) has been going on for a while, and a more recent definition (Fehr and Schmidt.[1]) postulates that people make decisions so as to minimize inequity in outcomes. There is a dirty side to it, in my view: the “willingness to sacrifice potential gain to block another individual from receiving a superior reward”. They argue that this apparently self-destructive response is essential in creating an environment in which bilateral bargaining can thrive. Without inequity aversion’s rejection of injustice, stable cooperation would be harder to maintain (for instance, there would be more opportunities for successful free riders).[3]True enough, Levitt and List (2007) have pointed out that laboratory experiments tend to exaggerate the importance of pro-social behaviors because the subjects in the laboratory know that they are being monitored.[17]An alternative[8] to the concept of a general inequity aversion is the assumption that the degree and the structure of inequality could lead either to accept or to aversion of inequality – but studies on students are not my thing (findings cannot be extraploated to work environments).
Surveys of employee opinions within firms have shown modern labor economists that inequity aversion is very important to them. Employees compare not only relative salaries but also relative performance against that of co-workers. Where these comparisons lead to guilt or envy, inequity aversion may lower employee morale.According to Bewley (1999), the main reason that managers create formal pay structures is so that the inter-employee comparison is seen to be “fair”, which they considered “key” for morale and job performance.[9]
It is natural to think of inequity aversion leading to greater solidarity within the labor pool, to the benefit of the average employee. However, a 2008 paper by Pedro Rey-Biel shows that this assumption can be subverted and that an employer can use inequity aversion to get higher performance for less pay than would be possible otherwise.[10] This is done by moving away from formal pay structures and using off-equilibrium bonus payments as incentives for extra performance. He shows that the optimal contract for inequity aversion employees is less generous at the optimal production level than contracts for “standard agents” (who don’t have inequity aversion) in an otherwise identical two-employee model.
Now that is WOW to me! And the solution to the puzzle of why some businesses prefer to go the fairness way rather than the performance way. Because it’s ultimately a cost-control method. It is indeed so much nicer to communicate limited pay in terms of fairness that people cannot help but relate to, right? Well, it’s a smart move. Or not? Because the reported impact on morale also explains low engagement proportions of people in business, in my opinion.
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