Monetary Reference Points of Managers – Empirical Evidence of Status Quo Preferences and Social Comparisons
| DOI | http://doi.org/10.1111/sjpe.12103 |
| Published date | 01 February 2017 |
| Date | 01 February 2017 |
MONETARY REFERENCE POINTS OF
MANAGERS –EMPIRICAL EVIDENCE
OF STATUS QUO PREFERENCES AND
SOCIAL COMPARISONS
Christian Grund* and Johannes Martin*
ABSTRACT
We explore whether monetary reference points affect managers0job satisfaction.
These reference points include a manager0s own status quo and the incomes of
comparable managers within the same firm and also at the market level. Making
use of a unique panel data set of managers in the German chemical sector, we
find that social comparisons of compensation do affect reported job satisfaction.
Both the relative income position within a manager’s own firm and a manager’s
wage rank on the market have positive relations with job satisfaction. There is
no evidence of the relevance of status quo considerations once we control for
firm-related pay variables.
II
NTRODUCTION
Neoclassical economic theory assumes that individuals care solely about their
own monetary outcomes. These outcomes are usually represented by wages
when employees are analysed. In contrast, behavioural (labour and personnel)
economists argue that individuals also consider certain reference points when
evaluating their own income. Employees’ utility does, hence, not only depend
on absolute income level alone, but also on the relative value. Two possible
reference points, which are widely discussed in the literature, are a person’s
own hitherto status quo (i.e. the most recent income level) and the incomes of
peers. If the two types of reference points do matter, employees may then take
their own wage of the previous period or the wage of other employees into
consideration in order to evaluate the utility of their own current income.
Previous studies on this topic have usually analysed only one possible refer-
ence point (either the previous status quo or social comparisons), making it
impossible to evaluate the relative relevance of the two concepts. We close this
gap and add to the existing literature by addressing the following questions in
particular: To what extent is job satisfaction affected by deviations from the
hitherto compensation (status quo) and by the difference between a person’s
*RWTH Aachen University
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12103, Vol. 64, No. 1, February 2017
©2015 Scottish Economic Society.
70
own wage and the wages of co-workers (social comparison)? Are there differ-
ences between comparisons on the firm level and on the industry level regard-
ing the relevance of social comparisons?
We focus on (middle) managers in the German chemical sector in our anal-
ysis. Employees in management positions are of big interest with regard to
our research questions, since they work in important positions within estab-
lishments. Their behaviour is crucial for the economic prosperity of a firm,
not only because of their direct impact, but also due to their indirect influence
regarding the performance of their subordinates. Lazear et al. (2014) provide
evidence that the quality of supervisor leadership has a substantial effect on
the productivity of subordinates. There are no formal collective wage agree-
ments for the individuals at these levels of firms’ hierarchies in contrast to
employees at lower levels in the large firms of the German chemical sector.
Hence, there is more discretion with regard to the remuneration of managers.
Besides, pay systems for managers in this industry usually include bonus
plans, which are dependent on individual and group performance to a certain
extent. This leads to differences in the total compensation for managers on
similar jobs, which is likely to trigger social comparisons in the workplace.
Because of their critical role for the performance of firms, it is important to
understand the effects of these wage differences. We abstain from including
top managers in our analysis, because the taxonomy of pay systems differs
considerably for this group.
We make use of a unique panel data set with rich information on income,
the work situation including job satisfaction and socio-demographics of man-
agers in the German chemical sector. We have individual panel data, so that
the relevance of possible deviations from the hitherto status quo can be
explored. Moreover, the data include information about the firm and the hier-
archical level of managers. Thus, we can define reference groups with which
managers are supposed to compare their incomes. We hereby distinguish
between the market level and the firm level: Ex ante, it is not clear whether
employees compare themselves with colleagues in the same firm or also with
employees in similar jobs in other firms.
We proceed by referring to the relevant theoretical and empirical literature
in Section II, before describing the data and estimation strategy in Section III.
The empirical results are presented in Section IV, followed by a conclusion in
Section V.
II THEORETICAL APPROACHES AND PREVIOUS EMPIRICAL FINDINGS
Income comparisons have always played a certain role in the economic litera-
ture (see Drakopoulos, 2011 for an overview of the history of earnings com-
parisons in economics). At present, there are several theoretical approaches
that deal with these income comparisons as well as many empirical contribu-
tions that test these approaches in terms of their empirical relevance. They
partly originate from other social sciences, but are nowadays also established
in behavioural economics. The focus of our study is on labour income
MONETARY REFERENCE POINTS OF MANAGERS 71
Scottish Journal of Political Economy
©2015 Scottish Economic Society
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