Abstract
Research has shown multiple cognitive biases that affect compensation related decisions. This research brief lists and describes several, including the bias held by most of us that we are too intellignet to fall prey to biases. Implications for HR and compensation practitioners conclude this research brief.
Compensation, benefits, and rewards practitioners can benefit from relevant research, if they know about it, understand it and are able to apply it. It is most useful when it helps us understand why things happen, so we can identify the causes. This enables us to build on causes that produce positive results and attempt to moderate the negative impact of those producing unwanted effects.
Performance and rewards strategies are intended to have a positive impact on attracting, retaining and motivating talent. Yet often even well-administered programs do not produce the desired result. For example, analytics applied to large databases consisting of employee attitude survey results generally show the typical employee believes their performance ratings are lower than they should be and that they are underpaid. This is not the intended outcome, so identifying the causes is important.
One of the principal reasons for dissatisfaction is cognitive bias. The research of Kahneman and Tversky on cognitive bias led to a Nobel Prize. 1 It also provided us with a window into the inner workings of our mental processes. Whatever the cause, our biases influence how we view things and make decisions. Knowing we are biased can help us pay attention to tendencies that may lower the quality of our decisions.
Their research shows that we
Believe we are better than we are: Several decades of research has shown that the median performer will believe she/he performs at the 75th to 80th percentile. 2 So even fair appraisals will not be readily accepted.
Accept data that agree with what we believe more readily, and that we resist contradictory evidence: This bias leads people to create their perspective based on the information they accept. So the conclusions they reach may be inaccurate, but they will influence their actions.
Accept too readily conclusions based on inadequate or inappropriate samples 3 : When deciding on whether their pay is competitive employees often base their assessment on a single case, which might be one peer. Executives often compare their compensation to that of executives in other organizations that are unlike their own.
Rely on literature that reports only successes and not on failures: Compensation managers are prone to assuming that a practice is always successful because they do not know about the failures. This can lead to creating fads.
Believe that intuitive conclusions are valid: When compensation practitioners trust their instincts or rely on past experience they may fail to aggressively search for relevant evidence that may suggest instincts are not valid.
Do not adequately consider regression to the mean: It is common for last year’s best performers to fail to do as well this year, or for last year’s poor performers to improve. It may result in attributing the changes to an action taken, which leads to a distorted view as to what the causal factors actually were.
Assume quantitative data have higher validity than subjective data: People are predisposed to believe workforce analytics and resulting algorithms have more validity than judgment when making decisions. This often leads to assuming that correlations also establish causation. Searching large databases will often result in discovering correlations that are spurious (e.g., A and B are correlated, but they may both be caused by C).
See puppies and other shapes in clouds when there are just clouds: System 1 thinking (intuitive/automatic/emotional) can lead to conclusions even though taking time to analyze the situation with System 2 thinking (reflective/analytical/rational) might refute the original conclusion. 4
Think the world makes much more sense than it does (fooled by randomness)5,6: Strong correlations between the type of programs adopted and the results can be the result of random variation. Seeing short-term patterns may lead to the conclusion that they will persist over the long run. We are fooled by short-term repetition.
Answer a simpler question when we have no answer to a more complex question: When System 1 thinking is puzzled System 2 thinking goes to work, but System 2 thinking requires substantial effort and it can be easier to oversimplify and deal with something that can be resolved. Oliver Wendel Holmes once said, “I would give nothing for simplicity this side of complexity, but everything for simplicity the other side of complexity.” Practitioners may recommend pay increases to resolve feelings of underpayment without seeking the true cause—for example, an employee may feel underpaid for what they could do if permitted, rather than underpaid for what the organization has them doing. The resolution is in career management, not pay management.
Believe we are too intelligent to be prone to bias: This is perhaps the most dangerous bias, since it precludes activating System 2 thinking, which can override where System 1 thinking takes us due to our biases.
Believe a lot of experience makes us wiser: Research suggests it takes 10,000 hours of relevant experience to become expert at something, but that experience must be organized to create thought models that work. 7 Whether someone has had 10 years of experience or 1 year of experience 10 times makes a difference in the amount of wisdom accumulated.
Implications for Practice
It is important to understand the biases people are likely to have and to recognize that their perceptions/beliefs are their reality, and that they will act on their perceived realities. It can be helpful to make employees aware of their biases, but this must be done in a way that does not appear defensive and self-serving for the organization. It is also necessary to recognize one’s own biases in order to better understand why you—and others—behave as you/they do. Seven books are cited here. They are beneficial for anyone who attempts to anticipate future behaviors that are likely to occur. And they summarize a large body of research and present findings in clear language. Time spent reflecting on what research has told us is an investment that will provide a high return.
Footnotes
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author received no financial support for the research, authorship, and/or publication of this article.