Saturday, July 4, 2009

The Equity Factor at Work

Let's play a game. Here are the rules: We'll be asked to split a sum of money. I get to make the split and you get to choose whether to accept or reject the split. And if you reject it, both of us will walk away empty-handed.

Rationally, I should realize my advantage and offer a lopsided split in my favor and you should accept the uneven split – because any amount of money is better than nothing. Right?

Wrong. If we're like everyone else who plays the game, we'll end up with an even split.

Here's why . . .

While the fairness of the split shouldn't logically affect the second player's decision, it nearly always does. If offered a lopsided split, the second player will reject the deal, and neither player will get any money. So most people end up offering a fifty-fifty split to the second person.

To find out why people react in this way, a team of Princeton researchers attached players to functional MRI machines. They discovered that when people are offered an unfair split, a primal part of their brains known as the anterior insula sends out signals of disgust and anger. It doesn't matter one little bit that rejecting the split – regardless of how unfair – is an irrational financial decision. It feels right.

That's the power of what I call "the equity factor." And it has everything to do with leadership in turbulent times.

A close look at the psychology of relationships reveals that most individuals automatically attempt to keep a mental balance between what they contribute to a relationship and what they get back from it. When employees believe that they are putting more into their company than they are getting back, or when they do not perceive the rewards distribution to be equitable, engagement slips dramatically.

When employees look for balance through equitable treatment, it is their perception of the treatment, rather than the treatment itself that defines reality. I once interviewed employees at a public utility where workers were negotiating a two-percent raise that management was resisting. At that same time, the fleet of corporate vans was being repainted. Instead of viewing this as a necessary expense, the employees' perception was that it was unfair of the company to spend money on vehicles while it argued about a salary increase with employees: "How dare they throw money at those trucks and then quibble about a lousy two-percent raise!"

The CEO of a chemical manufacturing company put it this way: " As a leader you must make it a routine part of your decision-making process to ask the question: Will this action be perceived as equitable?"

As companies downsize, restructure and refocus, employees are asked to do more and work harder. And they have, on the whole. But their resentment is most frequently seen in their reaction to executive compensation. Big disparities in pay between executives and the work force, especially in times of downsizing and plant closures, can destroy employee engagement – just when it is most needed.

Here's how one employee sees it: "The biggest budget cuts were employee-focused. They eliminated all our merit increases, rewards and recognition programs. And then the top management got bonuses. I used to be a 'gung-ho' employee. Now I think my loyalty has been misplaced "

The issue here goes beyond compensation – and right to the heart of the equity factor.

Carol Kinsey Goman, Ph.D., is an executive coach, author and keynote speaker who addresses association, government, and business audiences around the world. Author of ten books including "This Isn't the Company I Joined: How to Lead in a Business Turned Upside Down," and "THE NONVERBAL ADVANTAGE – Secrets and Science of Body Language at Work." For more information, contact Carol by phone: 510-526-1727, email: CGoman@CKG.com, or through her websites: www.CKG.com  and www.NonverbalAdvantage.com.