Salary Hikes May Not Improve Job Satisfaction In The Long Run

A new study finds that while people tend to be more satisfied with their jobs after a salary raise, the satisfaction is often short-lived, especially if the salary bump is a one-time event.

Investigators discovered job satisfaction improves with the expectation of the raise even before the salary advancement, but then satisfaction fades within four years of the wage increase.

In the study, researchers from the University of Basel carried out an in-depth investigation on the relationship between job satisfaction and wage changes. The connection is important because retention of human capital is a major concern for employers.

Economists Drs. Patric Diriwaechter and Elena Shvartsman explain that job satisfaction is a predictor for employee longevity. Their study appears in the Journal of Economic Behavior & Organization.

For this study, almost 33,500 observations from the representative German Socio-Economic Panel were analyzed, with the majority of individuals indicating a job satisfaction of seven on a zero to 10 scale.

In line with expectations, the study found that job satisfaction was positively influenced by wage increases.

Social comparisons also played a part in this; job satisfaction increased further when an individual’s wage rose by more than his/her peers’ wages over the same period.

Moreover, the researchers showed that employees were already more satisfied with their jobs one year before the effective wage increase, i.e., they appeared to be positively influenced by the mere expectation of such an event.

However, the rise in job satisfaction after a wage increase is only temporary, as the effect almost fades out within four years.

According to behavioral-economic theory, this can be explained by the fact that people do not evaluate their income in absolute terms, but rather in relation to their previous income.

Furthermore, people adapt to their new wage level over time, so a higher salary becomes the new reference point for future comparisons.

The same mechanisms appeared to be at work in the opposite direction: Negative reactions to wage cuts were surprisingly temporary.

Researcher believe this observation is consistent with reference point adaptations and social comparisons — since most wage cuts are associated with company- or industry-specific shocks, they typically also affect the respective individuals’ colleagues.

All in all, investigators conclude that wage increases can be a tool to motivate employees, yet only under carefully designed conditions.

For instance, the possibility of a wage increase should be implemented regularly and often accompanied by promotions. Therefore, a small merit raise every year may be more effective than a larger, less frequent increase.

Source: University of Basel

Posted by Patricia Adams