How Much Does Your Boss Make? The Effects of Salary Comparisons

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1 How Much Does Your Boss Make? The Effects of Salary Comparsons Zoë Cullen Harvard Busness School Rcardo Perez-Trugla Unversty of Calforna, Los Angeles Prelmnary Draft, Do Not Crculate Ths Verson: December Clck Here for Latest Verson Abstract We study how employees learn about the salares of ther peers and managers, and how those belefs affect ther own behavor. We conducted a feld experment wth a sample of 2,000 employees from a mult-bllon-dollar corporaton. We combne rch data from surveys and admnstratve records wth an experment that provded some employees wth accurate nformaton about the salares of others. Frst, we document large msperceptons about salares and dentfy some of the sources of these msperceptons. Second, we fnd sgnfcant behavoral elastctes wth respect to the perceved salares of other employees. These effects are dfferent for horzontal and vertcal comparsons: whle hgher perceved peer salary decreases effort, output and retenton, hgher perceved manager salary has a postve effect on those same outcomes. We dscuss evdence on the underlyng mechansms, and mplcatons for pay nequalty and pay transparency. JEL Classfcaton: D03, D60, D31, D80, I31, K34, Z10. Keywords: salary, transparency, relatve concerns, nequalty, productvty. Cullën: zcullen@hbs.edu, Rock Center 312, Boston, MA Perez-Trugla: rcardo.trugla@anderson.ucla.edu, 110 Westwood Plaza, Los Angeles, CA We are thankful for comments from Mkhal Galashn, Bobak Pakzad-Hurson, Gautam Rao, Roman Waczarg, Melane Wasserman and semnar dscussants at UCLA-Anderson, Wharton, Northwestern, Caltech, Dartmouth, Columba and Berkeley. The paper was possble thanks to excellent research assstance. Ths project was revewed and approved by the Insttutonal Revew Board at Unversty of Calforna Los Angeles (IRB# ).

2 1 Introducton Employees may care about the salares of other employees nsde the frm, such as the salares of peers and managers. They may use ths nformaton to form expectatons about ther own future salary, or they may have farness or nequty concerns. As a result, changng the salary of one employee can affect the behavor of other employees n the frm. These externaltes can have mportant mplcatons for the provson of ncentves wthn the frm. In ths paper, we address ths queston usng a large-scale, hgh-stakes feld experment n collaboraton wth a mult-bllon-dollar corporaton. We desgned and conducted a feld experment nvolvng a sample of 2,000 employees from a large commercal bank. The research desgn allows us to explore how employees learn about the salares of ther peers and managers, and how those belefs affect ther own behavor. To do ths, we combne three sources of data: a talored survey, nformaton-provson and nformaton-acquston experments, and rch admnstratve data on the behavor of the employees such as real tme data on the swpes n and out of the offce, emals sent and receved, sales performance, promotons, transfers and exts. The frst part of the research desgn addresses the formaton of salary perceptons. Employees report to be equally nterested n learnng about the salares of ther peers (.e., employees n the same poston and unt) and about the salares of ther superors. Our survey elcted belefs about the average salary among one s peers and the average salary among one s managers, usng an ncentvzed method. Ths research desgn dstngushes between two forms of pay comparsons: horzontal comparsons (.e., own salary relatve to peer salary) and vertcal comparsons (.e., own salary relatve to the manager salary). By comparng the perceved salares wth the actual salares from the frm s admnstratve records, we can measure salary msperceptons. Moreover, to dsentangle the sources of these msperceptons, we embedded an nformaton-acquston experment: we elcted the wllngness to pay for nformaton about peer salary and manager salary, usng an ncentvecompatble method. The second part of the research desgn addresses the behavoral effects of salary perceptons. We employ an nformaton-provson experment: for each employee, we flpped a con to decde whether she would receve a pece of nformaton about the average salary among peers; and we flpped another con to decde f the employee would receve a pece of nformaton about the average salary among managers. Because employees react to the nformaton provded to them, ths experment generated exogenous varaton n the salary perceptons that the employees held after the nformatonprovson. We can use admnstratve records to see whether these exogenous shocks to 2

3 perceved salares translated nto dfferences n behavor n the days or months after the survey was completed. We ntroduce a smple nstrumental-varables model that explots the expermental varaton n belefs to estmate the structural parameters of nterest, the cross-salary elastctes: e.g., the percent change n effort for each percent ncrease n the perceved manager salary. The frst set of fndngs documents sgnfcant nformaton frctons. Employees have large and systematc msperceptons about the salares of ther managers and ther peers. These msperceptons are substantal at all levels of the frm, and for all demographc subgroups. We show that a substantal part of these msperceptons are due to lack of nformaton nstead of just lack of nterest: on average, employees are wllng to pay 14 days worth of salary for a sgnal about the average salary of ther peers, and a smlar amount for a sgnal about the average salary of ther managers. We show evdence that the nformaton frctons arse from barrers to socal learnng. Our nformaton-experment reveals that even though each employees learns from the nformaton provded to herself, that nformaton does not travel to other employees n the network, not even to her closest peers. Ths evdence s consstent wth non-expermental evdence. We show that employees who gossp more and employees who are more central n the network do not have more accurate belefs about the average peer salary. Moreover, employees perceptons about average peer salary are not more accurate than what you would expect f ther own salary was the only nformaton that they had access to. The second set of fndngs documents large effects of salary perceptons on employee behavor. The cross-salary elastctes are statstcally and economcally sgnfcant, and ther sgn depends on whether the comparsons are vertcal or horzontal. A hgher perceved peer salary has negatve effects on effort, output and retenton. For example, a 1% ncrease n perceved peer salary decreases the number of emals sent by 0.63%, mplyng a behavoral elastcty of Vertcal comparsons have the opposte effects as horzontal comparsons: hgher perceved manager salary has postve effects on effort, output and retenton. For nstance, a 1% ncrease n perceved manager salary ncreases the number of emals sent by 0.18%, mplyng a behavoral elastcty of These behavoral effects are persstent over tme, they are dstrbuted homogeneously through dfferent groups of employees, and they are robust across dfferent specfcatons. We do not fnd evdence of asymmetrc effects, such as peer comparsons dependng on whether the employee s above or below the average peer salary however, we cannot rule out moderate asymmetres. We provde some suggestve evdence about the mechansms behnd these behavoral elastctes. To accomplsh ths, we measure the effects of perceptons on survey outcomes 3

4 (e.g., future salary expectatons), and we explot heterogenety analyss. Regardng horzontal comparsons, we fnd evdence of two channels beng at play. On the one hand, hgher peer salary ncreases expected future salary, whch motvates employees. However, there s a separate negatve channel that trumps the frst channel, whch could be attrbuted to socal concerns. Regardng vertcal comparsons, we fnd agan evdence of career concerns: hgher manager salary ncreases expected future salary, whch motvates employees. However, we do not fnd any evdence of socal concerns beng at play n vertcal comparsons. Snce t ncreased pay transparency at the margn, our nformaton-provson experment allows for an mpact-evaluaton of pay transparency. We fnd that hgher transparency has an nsgnfcant average effect on most forms of behavor, except for retenton, for whch t has a postve and sgnfcant average effect. Ths evdence suggests that ths frm may be better off by ncreasng pay transparency at the margn. At the same tme, our evdence suggests that the average employee would beneft from hgher transparency. Frst, transparency provdes employees wth nformaton for whch they revealed to be wllng to pay sgnfcant amounts. Second, accordng to survey data, the vast majorty of employees report to be n favor of hgher transparency as long as t dscloses salary averages by postons nstead of revealng the salares of specfc employees. Our fndngs have a number of mplcatons. Frst, we fnd that horzontal rewards have negatve externaltes whle vertcal rewards have postve externaltes. Ths provdes an explanaton for the robust fact that frms provde most of the fnancal ncentves vertcally (e.g., promotons) nstead of horzontally (e.g., performance pay). Smlarly, our evdence can also explan why frms dscrmnate aganst mnortes, such as females, vertcally rather than horzontally: e.g., n the frm where the experment was conducted, 92% of the gender pay gap comes from vertcal dfferences and only 8% through horzontal dfferences. Second, there s a wdespread vew that socal comparsons put pressure to compress salary dfferentals wthn the frm (Frank, 1984; Hamermesh, 1975), and a smlar moralebased argument s used to explan wage rgdtes (e.g., Solow, 1979; Bewley, 1999). Our fndngs suggest that ths vew s only true n a narrow sense: whle ths channel may force frms to reduce horzontal nequalty, frms are not restrcted n ther use of vertcal nequalty. Moreover, our fndngs suggest that polces amed at reducng pay nequalty by promotng pay transparency may be less effectve than prevously thought. Our paper s related to several strands of lterature. Whle there s a long standng theoretcal lterature on relatve salary (e.g., Frank, 1984; Romer, 1984; Summers, 1988; Akerlof and Yellen, 1990), the emprcal evdence has been laggng behnd. In a semnal contrbuton, Card, Mas, Morett and Saez (2012) conducted a feld experment to explore the effects of wage transparency n a unversty. They took a sample of unversty employees, 4

5 and sent a random subsample of them an emal wth nformaton about webste that lsted the salares of every employee at that unversty. One week later, the researchers sent a follow-up survey to the entre subject pool. They found that, for workers wth below-medan salares wthn ther occupaton, recevng the lnk to the webste decreased job satsfacton and ncreased the stated job search effort. Snce Card et al. (2012), others have studed the broader consequences of pay transparency (Cullen and Pakzad-Hurson, 2015; Perez-Trugla, 2015; Rege and Soll, 2015; Mas, 2017). Addtonally, there s a long standng lterature n psychology and economcs that measures the effects of unequal pece-rates on task performance, both n the laboratory (Charness and Kuhn, 2007; Clark, Masclet and Vlleval, 2010) and n the feld (Prtchard, Dunnette & Jorgenson, 1972; Valenz and Andrews, 1971; Schmtt and Marwell, 1972; Breza, Kaur, Shamdasan, 2017; Huet-Vaughn, 2017). Our study makes four key contrbutons to the exstng lterature. Frst, whle the exstng evdence focuses on horzontal comparsons, we are the frst to ncorporate vertcal comparsons as well. Ths s mportant because vertcal nequalty comprses the vast majorty of the wthn-frm nequalty. In the frm where our experment was conducted, 95% of the pay nequalty s vertcal and the remanng 5% s horzontal ths decomposton s n the same order of magntude for other frms. 1 Snce ndvduals react wth opposte sgns to horzontal and vertcal comparsons, the dstncton between the two ends up beng crtcal. Second, we contrbute from a methodologcal perspectve. Rather than estmatng the reduced-form effects of nequalty or transparency, our novel research desgn dentfes the structural parameters of nterest, the cross-salary elastctes, by combnng an nformaton provson experment, survey data and behavoral data. Thrd, ths study s unque n terms of the scope of the feld experment. Ths s a hghstakes envronment for our subjects, wth thousands of careers and bllons n revenues at stake. Ths frm provdes an envronment that s qute representatve of large frms around the world n key aspects such as pay transparency, salary nequalty and norms about pay secrecy. Moreover, the close collaboraton wth the frm allowed us to measure some aspects of the employee s lfe that had not been studed before, such as ther behavor, perceptons, wllngness to pay for nformaton and dffuson of nformaton n the network, among others. Fourth, our nformaton-provson experment provdes arguably the frst mpact-evaluaton analyss of hgher pay transparency. Most companes n the world, ncludng the frm where ths experment was mplemented, actvely choose not to be transparent about pay (??) even though they do not have hard evdence that such polcy s n the frm s best nterest. Even though we cannot generalze the fndngs to all frms, our evdence at least suggests 1 Detals about the nequalty decomposton reported n Appendx B. 5

6 that more frms should experment wth hgher transparency, and that governments should consder dsclosure polces too. Our study also contrbutes to a growng lterature showng that ndvduals have substantal msperceptons of ther relatve ncome (e.g., Cruces, Perez-Trugla, and Tetaz 2013; Karadja, Mollerstrom, and Sem 2017). Whle ths lterature shows that correctng these msperceptons has sgnfcant effects on stated preferences for redstrbuton, there s lttle evdence on whether these msperceptons affect behavor (Bottan and Perez-Trugla, 2017). We show that msperceptons about relatve salary can have substantal consequences for behavor. The rest of the paper proceeds as follows. Sectons 2 and 4 descrbe the research desgn and the survey desgn, respectvely. Secton 4 presents the mplementaton detals and the admnstratve data. Secton 5 presents the results about the formaton of salary perceptons. Secton 6 presents the results on behavoral elastctes. Secton 7 presents the mpactevaluaton of transparency. The last secton concludes. 2 Research Desgn In ths secton, we ntroduce the conceptual framework, hypotheses and the econometrc model used to dentfy the behavoral elastctes. 2.1 Conceptual Framework and Hypotheses We focus on perceptons of average salary among peers and among managers. Followng Card et al. (2012), we defne peers as those employees who share the same poston ttle and organzatonal unt. For nstance, the peers of a teller n a certan branch would be all the other tellers n the same branch; the peers of a junor researcher n the nvestment bankng dvson would be all the other junor researchers n the same dvson. In turn, one s manager can consst of employees who are n postons of hgher level, whch supervse the ndvdual s work to some extent and to whch the employee could aspre to be promoted to. For example, the managers of a teller could be the teller supervsors; the managers of a junor researcher n the nvestment bankng dvson could be the senor researchers. Let subscrpt ndex employees. Let O be s own salary thnk of basc salary, wthout any commssons or bonuses. Let P be s percepton about the average salary among s peers. Let M be s percepton about the average salary among s managers. Let Y be a form of employee s behavor, such as the effort or sales performance. The followng equaton establshes the potental relatonshp between behavor and salares: 6

7 log (Y ) = η 0 + η own log (O ) + η peer log (P ) + η mgr log (M ) (1) The parameter η own denotes the own-salary elastcty. If Y s the labor supply, then η own would correspond to usual labor supply elastcty. In addton to the own-salary elastcty, equaton (1) allows employees to react to ther perceptons of the salares of other employees, through η peer and η mgr. We denote these two parameters as the cross-salary elastctes. Equaton (1) makes a number of smplfyng assumptons. Some of these functonal form assumptons, such as lnearty and symmetry, wll be relaxed n the emprcal secton. Also, our baselne specfcaton does not allow employees to care about the average salary n other groups (e.g., ther subordnates), or to care about other characterstcs of the dstrbuton of salares (e.g., the maxmum salary nstead of the average salary). Ideally, we would estmate a fully saturated model where the rght hand sde of equaton (1) ncludes one term for every employee n the company. However, estmatng such model would be unfeasble. If anythng, to the extent that our choce of specfcaton may mss the most mportant belefs, our baselne model could only lead to under-estmaton of the true cross-salary elastctes. We choose to focus our specfcaton on the average salary of peers and managers based on pror studes, ntervews wth employees and wth managers from the Human Resources dvson. We collected survey data to valdate ths choce of specfcaton. At the end of the survey, we asked employees to rank how nterested they would be n learnng about the average salary n dfferent postons at the company: ther same poston, the postons rght above ther own level, two or more levels above, and other postons. The dstrbuton of responses confrms that peer and manager salary are the sngle most mportant nformaton for employees: roughly 50% of subjects ranked ther own poston frst, 45% of subjects ranked hgher postons, and less than 5% of respondents ranked other postons. We classfy the potental mechansms at play n two man groups: career concerns and socal concerns. Career concerns refer to the possblty that worker s effort depends not only on the current salary but also on expectatons about future salary (Gbbons and Murphy, 1992; Holmstrom, 1999). When ndvduals fnd out about the salary of ther peers and managers, they may update ther expectatons about ther own future salary and may want to change ther behavor accordngly. For nstance, an ndvdual who fnds out that peers are gettng pad more can use that nformaton as leverage n future salary negotatons, thereby ncreasng the expected future salary. Ths change n expectatons should make t more attractve to work at the frm and should affect the ndvdual s behavor, such as makng her more lkely to exert effort to retan her job, and less lkely to search for another job. Smlarly, f the ndvdual 7

8 thnks there s a postve probablty of reachng a gven manageral poston, an ncrease n the perceved manager salary would also ncrease the expected own future salary. Agan, ths change n expected salary should ncentvze the ndvdual to work harder and dssuade her from lookng for another job. As a result, ths mechansm would predct η peer > 0 and η mgr > 0. On the other hand, socal concerns refer to the possblty that employees have socal preferences over the dstrbuton of salares such as postonal concerns, nequty averson and unfarness averson (Frank, 1984; Romer, 1984; Summers, 1988; Akerlof and Yellen, 1990; Lazear, 1989). Consder for example the case of an employee whose morale depends on hs relatve salary. A hgher perceved peer salary should decrease the employee s morale and thus reduce the employee s effort and the lkelhood that the employee stays n the frm. Smlarly, a hgher perceved manager salary should also decrease the employee s morale and thus reduce her effort and her wllngness to stay at the frm. As a result, ths mechansm predcts η peer < 0 and η mgr < Econometrc Model In ths secton, we present the emprcal framework used for dentfcaton. Obtanng causal estmates of the cross-salary elastctes η peer and η mgr s challengng snce a smple regresson of behavor on perceved salares would be subject to the usual concerns wth omtted varable bases. For nstance, ndvduals wth lower perceved peer salary may have lower ablty, whch would create a spurous elastcty η peer < 0. Our emprcal framework explots the random varaton n belefs nduced by the nformaton provson experments to estmate the cross-salary elastctes. To understand the ntuton of ths model, consder a par of employees who have the same bas n perceved peer salary: both of them under-estmate the actual peer salary by 10%. Then, we randomly assgn nformaton about the true peer salary to one of these two employees. The frst stage of the regresson measures the effect of the nformaton provson on belefs. Let s say that, relatve to the ndvdual who does not get the nformaton, the ndvdual who gets the nformaton ends up updatng her perceved peer salary by 5%. The reduced form regresson follows these two ndvduals after they complete the survey, and compares the behavor of the employee who was randomly chosen to receve the nformaton to the behavor of the employee who was randomly chosen not to receve the nformaton. Let s say that, relatve to the ndvdual who does not get the nformaton, the ndvdual who gets the nformaton ends up exertng an addtonal 2.5% effort. The nstrumental varables model nfers the elastcty by puttng these two results together: n ths example, the nformaton provson ncreases perceved peer salary by 5% and effort by 2.5%, whch 8

9 mples a cross-salary elastcty of 0.5 (= ). The above example followed a par of ndvduals who under-estmated ther peer salary by 10%. In practce, we may encounter pars of employees who under-estmate the peer salary by 5%, others who over-estmate t by 15%, and so on. Thus, we would have to repeat ths exercse for dfferent pars and then estmate an average elastcty by averagng over all of these pars. We accomplsh ths by means of the followng nstrumental varables specfcaton, whch bulds on a smple Bayesan learnng model. Let P pror denote the pror belef about the average salary of peers that s, the belef rght before the ndvdual reaches the nformaton-provson experment. Let P sgnal be the value of the sgnal on average salary that s randomly assgned n the nformaton-provson experment. Let T P be a dummy varable that takes the value 1 f the ndvdual s shown the sgnal and 0 f not. Denote P post as the correspondng posteror belef that s the perceved peer salary rght after the nformaton-provson experment was conducted. And defne M pror, M sgnal, T M, M post as the correspondng varables for perceved manager salary nstead of perceved peer salary. Let Y post denote some average behavor n the perod begnnng wth the nformaton provson experment and endng some tme later. For nstance, Y post could be the average number of hours n the offce n the 60 days rght after the nformaton-provson. Let Y pror denote the the average behavor n the perod pror to the nformaton-provson experment nstead of the perod after t. The frst stage of the nstrumental varables model corresponds to belef updatng. When prors and sgnals are normally dstrbuted, Bayesan learnng mples that the mean of the posteror belef should be a weghted average between the sgnal and the mean of the pror belef. In the case of perceved peer salary, Bayesan learnng can be summarzed as follows: P post = α ( P sgnal P pror ) + P pror (2) Ths smple lnear model, or slght varatons of t, has been found to have an excellent ft n a number of contexts such as nflaton expectatons (e.g., Armanter et al., 2016; Cavallo, Cruces and Perez-Trugla, 2017) and perceptons of relatve ncome (Bottan and Perez-Trugla, 2017). We can ntroduce the nformaton provson experment to ths learnng specfcaton: P post = α ( P sgnal P pror ) T P + β ( P sgnal P pror ) + P pror (3) The parameter α represents the learnng rate, whch ranges from 0 (ndvduals gnore the sgnal) to 1 (ndvduals fully adjust to the sgnal). In turn, the parameter β controls for 9

10 any spurous reverson to the sgnal. 2 Ths equaton provdes a smple way to summarze the effects of random assgnment (T P ) on the posteror belefs (P post ). The nstrumental-varables model smply solates that random varaton n belefs to dentfy the cross-elastctes: log ( Y post ) = π0 + η peer + π 1 ( P sgnal post ˆP P pror post + η mgr ˆM ) + π2 ( M sgnal + M pror ) + π3 P pror + π 4 M pror + ɛ (4) P post = ν 0 + ν 1 ( P sgnal + ν 3 ( P sgnal P pror ) T P + ν 2 ( ) + ν4 ( M sgnal P pror M post = µ 0 + µ 1 ( P sgnal + µ 3 ( P sgnal P pror P pror ) T P + µ 2 ( ) + µ4 ( M sgnal M sgnal M pror M sgnal M pror M pror ) T M ) + ν5 P pror M pror ) + µ5 P pror + + ν 6 M pror + ξ 1 (5) ) T M + The relevant excluson restrctons for the estmaton of η peer and η mgr are: + µ 6 M pror + ξ 2 (6) E [( P sgnal P pror ) ] [( T P ɛ = 0 and E M sgnal M pror ) ] T M ɛ = 0 (7) The random assgnment of {T P, T M } satsfes these excluson restrctons. In practce, we nclude a set of addtonal control varables, wth the goal of reducng the varance of the error term and thus mprovng the precson of the estmates. Most mportant, we control for pre-treatment outcomes, whch s typcally used n feld experments to gan precson (McKenze, 2012). Addtonally, we nclude controls for tenure (n months) and dummes for brthplace, gender and sales-role. Last, we can explot the tmng of the nterventon to provde a falsfcaton test, n an event-study fashon. For that, we can estmate the same nstrumental varables model from above, but usng Y pror nstead of Y post as dependent varable. Intutvely, the nformatonprovson experment should not affect the behavor n the pre-treatment perod, because the ndvduals have not been exposed to the nformaton yet. Thus, the cross-salary elastctes should be zero when we use pre-treatment outcomes as dependent varable. 2 For example, f ndvduals take a lttle addtonal tme to thnk when asked a queston a second tme, they would tend to revert to the truth, even f they dd not actually receve any further nformaton from the expermenter. 10

11 3 Survey Desgn A sample of the full onlne survey s ncluded n Appendx?? to protect the dentty of the frm, we strpped the formattng and dentfyng nformaton. In ths secton, we dscuss the most mportant aspects of ts desgn. 3.1 Tranng The frst part of the survey was desgned to tran the respondents to understand the rest of the survey. The survey begns by explan how the ncentvzed questons work and why t s n the respondent s best nterest to respond honestly. To llustrate these prncples n practce, we ncluded some sample ncentvzed questons on topcs that are unrelated to salares. Addtonally, we explan the defnton of basc salary used n the rest of the survey. We chose to focus on basc salary:.e., the salary before any addtons or deductons such as taxes, allowances, commssons or bonuses. More specfcally, we phrase all the questons about monthly basc salary. Accordng to ntervews wth the HR department and employees who were not partcpatng n the experment, ths s supposed to be the most mportant aspect of the compensaton that employees pad attenton to. Moreover, ths basc salary accounts for 90% of the total compensaton for the subjects n our sample. 3 To confrm that respondents understood ths defnton, we asked them to provde a guess about ther own salary for the month of March of We told them that n the next screen we would tell them f they got t rght or not, and we would pay them a reward for accuracy. In the followng screen we show them ther guess and the truth sde-by-sde. If the respondent s guess s not wthn 5% of the truth, we show them an addtonal screen explanng the defnton agan, and ask them whether they agree or not wth our fgure. Ths queston was also ntended to make t clear to the surveyor already knows the salary of the respondent, to mnmze any concerns that respondents may not be honest n ther salary responses because they worry about revealng nformaton about ther own pay. 3.2 Salary Perceptons Ths s the man part of the survey, whch s repeated twce: once regardng the average salary of peers, and a second tme regardng the average salary of managers. Each of these modules was comprsed of the followng four steps: 3 The man form of performance pay corresponds to sales commssons. Performance pay s mportant for employees at the very hgh level of the frm, but those employees are excluded from the sample. 11

12 Step 1 (Elct Pror Belef): We ask respondents about the average monthly basc salary among ther peers/manager. To elct truthful responses, we offered reward for accuracy usng the tradtonal quadratc loss functon (up to $2.61 per queston). 4 Moreover, to have a proxy for certanty n belefs, we also elcted the dstrbuton of belefs over a seres of bns around the respondent s guess ths queston was ncentvzed as well. Step 2 (Elct Maxmum Wllngness to Pay): We offered respondents to buy nformaton about the average salary computed over a random sample of fve peers/managers. To elct ths nformaton n an ncentve-compatble way, we employed the multple prce lst varaton of Becker-DeGroot-Marschak (Andersen et al., 2006). Ths method conssts of makng respondents choose n fve hypothetcal scenaros. In each scenaro, they were gven the choce of ether seeng the nformaton about average salary of peers/manager or recevng extra money as part of the survey reward. The fve scenaros dffered n the reward amount: $1.3, $6.5, $26.1, $130.5 and $ We explaned to subjects that t was n ther best nterest to choose truthfully, because wth a 1% probablty one of the fve scenaros would be randomly chosen to be executed. For the 2% of respondents who had ther scenaros executed (1% for the peer salary and 1% for the manager salary), that was the end of the experment and thus we exclude them from the subject pool. Step 3 (Informaton-Provson Experment): There were two peces of nformaton to be randomly allocated: the average salary among a random sample of fve peers; and the average salary among a random sample of fve managers. We cross-randomzed these two peces of nformaton. As a result, there were four treatment groups, wth equal probablty of assgnment: one group receves a sgnal about the average salary of peers but no salary nformaton about ther manager; one group receves a sgnal about the salary of ther manager but not peers; one group receves nformaton about both ther peers and manager s salary; and one group receves no salary nformaton. To avod ndvduals makng nferences from the act of recevng nformaton, we made the randomzaton explct. In a frst screen, we let the respondents know that a group of ndvduals partcpatng n ths survey wll be randomly chosen to receve some nformaton about the average salary of peers/manager. In the followng screen, we let the subjects know whether they have been chosen to receve the nformaton or not. 4 We dd not nform subjects whether they got any of the specfc questons rght or wrong, to avod subjects learnng nformaton from ther rewards. Furthermore, the rewards are pad jontly wth partcpaton fees, whch ncludes a substantal porton that s randomly determned, so that the total payment receved s a weak sgnal of the overall accuracy of the responses durng the survey. 12

13 Step 4 (Elct Posteror Belef): We let the subjects know that we want to gve them the opportunty to reassess ther answer to one of the prevous questons. To avod subjects makng nferences based on the opportunty to re-elct ther guesses, we explctly note that ths opportunty was gven automatcally to all survey partcpants, regardless of ther responses. There are a few addtonal detals that are worth dscussng. For the average peer salary, we ask subjects to guess the average salary among ndvduals n the same poston and unt. To mnmze ambguty, we state the full poston ttle, the full name of the unt, and we state the number of employees currently workng n the peer group. When elctng belefs about manager salary, we elct belefs about the average salary of all employees who have a certan manageral poston, whch we state n full. To choose the manageral poston to ask about, we used admnstratve data to dentfy a set of managers:.e., other employees n the same unt who have power over the respondent such as approvng performance evaluatons, leaves of absence and nternal transfers. Accordng to ths defnton, one employee can have multple managers, n whch case we pck one poston from ths set. The dstance between the respondent and the manager can be mportant to understand the mechansms at play. For ths reason, before elctng the perceved manager salary, we ncluded two questons to assess the perceved dstance: the number of promotons needed to reach that poston, and the lkelhood of reachng that poston n the next fve years. To gve a sense of the average dstance, the average respondents perceved ther manager to be 2.X promotons ahead and expected to reach that poston wth X% probablty. 3.3 Survey Outcomes The man focus of the paper conssts on measurng the effects of salary perceptons on behavor. Addtonally, ncluded a few survey questons at the end of the survey to be used as survey outcomes. We are not nterested n the effects of salary perceptons on survey outcomes per se, but as complementary evdence on the mechansms drvng the behavoral effects. The frst three questons are ntended to provde suggestve evdence about the socal concerns mechansms. Frst, we wanted to measure the effects of salary perceptons on employee morale. We follow a lterature that uses self-reported employee satsfacton to proxy for employee morale (Clark and Oswald, 1996). We ncluded one queston about pay satsfacton: How satsfed are you wth your current salary? Ths queston was asked n a 5-pont scale from very dssatsfed (1) to very satsfed (5). Addtonally, we ncluded a queston on overall job satsfacton: Takng all the aspects of your job nto account, how 13

14 satsfed are you wth your current j ob? Ths queston s asked usng the same 5-pont scale. Another form of socal concerns has to do wth socal preferences. To assess the mportance of ths channel, we asked ndvduals whether they agree or dsagree wth the pay nequalty across the frm. T hs a tttude s m easured b y t he q ueston p erceved salary nequalty: Across the thousands of [Bank Name] employees, salares vary wth the nature of work, educaton, experence, responsbltes, etc. What do you thnk of wage dfferentals n the company today? The possble answers were (1) they are too small, they are adequate (2) and they are too large (3). Ths queston follows the tradton of the lterature on preferences for redstrbuton, whch uses a smlar queston about atttudes towards nequalty (Perez-Trugla, 2015). We ncluded two questons to assess the mportance of the career concerns channel. Accordng to ths channel, the effects of salary perceptons operate by changng expectatons about future salary. We measure those expectatons drectly, by askng ndvduals ther expected future salary 1 year head as well as 5 years ahead. To ncentvze ths queston, we told ndvduals that we would compare ther guesses wth our own predctons for these future salares, and reward them based on how close ther answers fall from our own predctons. The last survey outcome s ntended to test another form of career concerns. It s possble that ndvduals react to the nformaton about salares of others not because they learn about ther relatve pay but because they learn about ther relatve productvty. To test ths channel, we ncluded a queston about perceved productvty rank. In each annual revew, each employee s assgned to a productvty ratng on a scale from from D to A+. Thus, we elct the ndvdual s percepton about the share of employees who have been assgned to each grade durng the last yearly revew. We ncentvzed ths queston by rewardng ndvduals for accurate responses. Wth these perceved shares and the employee s own grade, we can nfer the employee s self-perceved rank n the dstrbuton of productvty ratng. 14

15 Full Verson of the Paper to be Posted Soon...