Vienna, Austria – It is a sobering fact that a salary increase will only satisfy and motivate employees for a very short period of time - certainly no longer than half a year, and generally for no more than one or two months.
Of course, the increased expense to the company will remain long after the employee has ceased to feel the benefit.
The hedonic treadmill
A salary increase is a great reason to get together with family and friends and drink a toast to your professional success. However, for many employees the pleasure of having more money coming in each month soon disappears. You may be thrilled the first few times you see the increased amount on your payslip, but this satisfaction evaporates over the subsequent months, and at the same time, your motivation will return to its baseline level too.
We should aim to live our lives in a pattern of permanent improvement and constant development. If nothing changes, then life becomes boring and monotonous. Moreover, humans are essentially adaptable and able to adjust quickly to new situations. These factors mean that employees are only motivated and satisfied with a higher basic salary for a very short period of time. The majority of employees quickly adjust their lifestyle to their new income. This phenomenon is known in psychology as the “hedonic treadmill.”
Salary discussion is taboo and even forbidden in most companies, so the majority of employees do not know how much they are receiving compared to their colleagues. Generally, graduates with 10-15 years of experience can expect their salary increase to average around 5%, with a maximum 10% increase in many companies.
Although these percentage increases seem modest, the effect of compounding means that the salaries should double within 10-15 years. With the use of skilful salary negotiations and tactical job changes, the best and brightest may be doubling their salary every five years by the age of 40.
The psychology of pay
Once an employee’s income is sufficient to satisfy the most important needs of life such as housing, clothing and food, any further increase is much less noticeable.
Salary increases are therefore much more important to those who earn less, in particular unmarried people earning less than 20,000 Euros gross per year and families bringing in less than 30,000 Euros gross.
Above this level, employees quickly adapt to salary increases, adjusting their lifestyles to absorb the higher income. Young, educated employees quickly build up their income year on year. Even if the base salary increase is only motivational in the short term, there is still the prospect of next year’s pay rise to aspire to.
At the other end of the scale, people with an income of over 100,000 Euros gross per year often feel that money no longer plays an important role in their lives. Even an increase from 150,000 to 160,000 Euros does not bring any additional motivation or job satisfaction. At this point, salary negotiations become a game, an adventure and an ego trip, without having any real effect on lifestyle.
Salary and the cost of living
On a societal level, salary increases are significant in the context of national economic growth. For example, Austria has seen great increases in living standards and prosperity over the last 20-30 years. Consumer products that were once luxuries are now universally affordable, especially technology and IT products. In absolute terms, people are becoming wealthier, but as this prosperity is ubiquitous, it is less noticeable – you may have a nice new mobile phone, but if everyone else has one too, you won’t “feel” rich.
However, the day-to-day cost of living is rising sharply at the same time. Rents have increased more than 30% since 2007, especially in expensive cities such as Vienna. Half of young professionals doubt their ability to afford to live alone, and it is becoming more and more difficult for high-earning young people to build up capital assets.
High-earning professionals frequently lose their income and status when they retire. In Austria, the effects of the 2003 and 2004 pension reforms are starting to show. Pensions have risen more than prices during the past 15 years, so current retirees are able to maintain a comfortable lifestyle.
However, the Austrian cohort who will retire in 2028 will only be eligible for the full state pension if they have paid the maximum social security contribution systematically for 40 years. For executives, top managers and high-earning specialists, this will result in a significant income drop.
Moreover, improvements in lifestyle and medical technology mean that with every couple of years, the average life expectancy increases by another five years. Before long, living to 90 will become the rule rather than the exception, and girls who are born today in Austria are likely to live to an average age of 100.
It is therefore vitally important for high-earning professionals to avoid an impoverished old age by making their own pension provisions. The state pension will not be enough.
At least one-third of the monthly salary should be put aside for a pension, with two-thirds covering everyday expenses such as accommodation, transport, insurance, clothing and travel. It is wise to use salary increases to finance a stable retirement rather than current luxuries.
Conclusion: a fair day’s wage for a fair day’s work
In 2016, employers who try to please their personnel with a salary increase are likely to face disappointment. For most employees, the motivational effect of a basic salary increase lasts for less than two months. The lowest-paid employees will benefit the most from an income increase as their financial pressure is reduced, but these employees tend to have little scope to negotiate salaries as their incomes are usually schematically regulated (for example through collective agreements).
Young graduates see the sharpest rise in career development and social status over the first ten to fifteen years of working life, before the income curve starts to flatten. However, they may not perceive the full extent of their progress if it is comparable to that of their peers.
For high-earning professionals and especially managers, salary negotiations are a challenge and a boost to self-esteem rather than a necessity to cover the everyday cost of living. These individuals tend to be motivated by performance and responsibility in themselves.
Although increases in basic salary do not provide long-term motivation, regular salary increases at fair market levels are nevertheless important to prevent demotivation.
- Low–earning employees will have a better lifestyle if they can support themselves on their wages rather than by state benefits, which are generally lower and less socially respected.
- Young graduates will experience the same professional and social advancement as their peers, and will believe that their professional efforts are paid off.
- Managers perceive a higher salary as the company’s recognition of their efforts, achievements and responsibilities.
It is entirely normal for employees to be slightly dissatisfied with their salaries, as it is always possible to be paid a little more money for the same work. For employee motivation, the actual amount of compensation is nowhere near as important as the fact that they are fairly compensated in comparison to their colleagues, and their counterparts in other companies.
If employees receive fair compensation, this will motivate them to address the fundamental issues that play a truly important role in their satisfaction and commitment – a good working environment, fulfilling work activities and healthy relations with superiors and colleagues.
Pedersen & Partners is one of the fastest-growing, fully integrated Executive Search firms worldwide; it is 100% owned by its partners who all work full-time to serve its clients. The firm celebrated its 15th anniversary in January 2016, and to mark this occasion, it has created a timeline web page, featuring key milestones for the firm’s development and has released an anniversary video.
Conrad Pramböck is the Head of Compensation Consulting at Pedersen & Partners. Based in Vienna, Austria, he is responsible for consulting companies on all aspects of compensation, including providing companies with up-to-date market information on salary ranges and design of bonus systems across all industries and geographies. Prior to joining the firm, Mr. Pramböck held several senior positions in international consultancy firms. He started his career with a German Consultancy firm working in management consulting and later in the Compensation Consulting business unit based in Austria. For the following seven years he worked with one of the top Austrian Executive Search firms as the Head of Compensation Consulting. He was responsible for all international compensation consulting activities and developed and maintained an international compensation database in 40 countries.
Pedersen & Partners is a leading international Executive Search firm. We operate 56 wholly owned offices in 52 countries across Europe, the Middle East, Africa, Asia & the Americas. Our values Trust, Relationship and Professionalism apply to our interaction with clients as well as executives. More information about Pedersen & Partners is available at www.pedersenandpartners.com
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