Employee Compensation and Benefits

Money Doesn’t Buy Happiness. Well,

on Second Thought . . .

If money can’t buy you love, can it still buy you happiness

?

A

now famous

1974 study seemed to

indicate that the answer was

no

.

U.S.

econo

mist Richard

Easterling

, then at the University of

Pennsylvania

, studied

comparative data on moderately wealthy and very wealthy

countries and

concluded that although rich people are happier than

poorer people, rich countries are

not

happier than

poorer one

s,

and they do

not

grow happier as they grow increasingly rich. The

explanation for this

apparent paradox, said Easterlin, was that only

relative income

—

your income compared to that of your

peers and

neighbors

—

matters to happiness, not absolute income.

Now

, however, two Wharton

professors, Betsey Stevenson and

Justin Wolfers, say that the Easterlin paradox, as it has came to be

called, does not exist. Based on new research, they say that the truth

isn’t paradoxical at all, but is in

fact very simple: “1. Ri

ch people are

happier than poor people. 2. Richer countries are happier than

poorer

countries. 3. As countries get richer, they tend to get happier.”

Pointing out that 35 years ago

Easterlin had little data to work

with, Stevenson and Wolfers draw their co

nclusions from data about

more countries, including poor ones, over longer periods of time.

Public opinion surveys and other

studies show that life satisfaction

is highest in richer countries

.

In the United States, for instance, 9

in 10

Gallup Survey respo

ndents in households making more than

$250,000 a year called themselves “very

happy,” compared to only

4 in 10 with incomes below $30,000. “On balance,” Stevenson

and Wolfers

conclude, “GDP and happiness have tended to move

together.

”

The bottom line, they say, is that

absolute income matters.

What do these new

findings mean in practice? A pair of British

economists

suggest that government’s policy goals should focus

less on growing GDP and more on improving

measures that

directly affect happiness.

Easterlin would probably agree. He now concedes that

people

in w

ealthy countries do report more happiness than those

in poorer countries. But he still doubts that

money alone is the

reason. Comparing Denmark and Zimbabwe, for instance, he

says, “The Danes have

social welfare policies directed toward

some of the most sa

lient concerns of families

—

their health,

care

for the aged, child care. If you ask why the Danes are

happier, an alternative hypothesis is they have a

set of

public policies

that deal more immediately with people’s

fundamental concerns

.”

In addition,

the

tiny Himal

ayan kingdom of Bhutan has, in fact,

replaced GDP with a measure it calls “gross national

happiness.”

Critical Thinking Questions

1.

What

do you think is the role of money as a determinant of a

person’s satisfaction at work and

with life in general? Should

organizations worry about this issue? Explain.

2.

As discussed in this chapter, firms vary widely on the extent

to which they emphasize

money as

an incentive. Do you

think an emphasis on financial incentives is good or bad?

Explain.

3.

For the past 90 years or so, job evaluation as a compensation

tool has been designed to assess

the value of each job

rather than to evaluate the person doing the job, prompting

a relatively

flat pay schedule for all incumbents in a particular

position. Some HR experts believe that the

emerging

trend is for pay inequality to become “normal.” Employers

are using variable p

ay to

lavish financial resources on their

most prized employees, creating a kind of corporate star

system. “How do you communicate to a workforce that

isn’t created equally? How do you treat

a workforce in

which everyone has a different deal?” asks Jay Sch

uster

of Los Angeles

–

based

compensation consultants Schuster

-

Zingheim & Associates, Inc. If you were asked these

questions,

how would you answer them

?

Given the issues

just discussed

in this case, what

Money Doesn’t Buy Happiness. Well, on Second Thought . . .

If money can’t buy you love, can it still buy you happiness? A now famous 1974 study seemed to

indicate that the answer was no. U.S. economist Richard Easterling, then at the University of

Pennsylvania, studied comparative data on moderately wealthy and very wealthy countries and

concluded that although rich people are happier than poorer people, rich countries are not happier than

poorer ones, and they do not grow happier as they grow increasingly rich. The explanation for this

apparent paradox, said Easterlin, was that only relative income—your income compared to that of your

peers and neighbors—matters to happiness, not absolute income. Now, however, two Wharton

professors, Betsey Stevenson and Justin Wolfers, say that the Easterlin paradox, as it has came to be

called, does not exist. Based on new research, they say that the truth isn’t paradoxical at all, but is in

fact very simple: “1. Rich people are happier than poor people. 2. Richer countries are happier than

poorer countries. 3. As countries get richer, they tend to get happier.” Pointing out that 35 years ago

Easterlin had little data to work with, Stevenson and Wolfers draw their conclusions from data about

more countries, including poor ones, over longer periods of time. Public opinion surveys and other

studies show that life satisfaction is highest in richer countries. In the United States, for instance, 9 in 10

Gallup Survey respondents in households making more than $250,000 a year called themselves “very

happy,” compared to only 4 in 10 with incomes below $30,000. “On balance,” Stevenson and Wolfers

conclude, “GDP and happiness have tended to move together.” The bottom line, they say, is that

absolute income matters. What do these new findings mean in practice? A pair of British economists

suggest that government’s policy goals should focus less on growing GDP and more on improving

measures that directly affect happiness. Easterlin would probably agree. He now concedes that people

in wealthy countries do report more happiness than those in poorer countries. But he still doubts that

money alone is the reason. Comparing Denmark and Zimbabwe, for instance, he says, “The Danes have

social welfare policies directed toward some of the most salient concerns of families—their health, care

for the aged, child care. If you ask why the Danes are happier, an alternative hypothesis is they have a

set of public policies that deal more immediately with people’s fundamental concerns.” In addition, the

tiny Himalayan kingdom of Bhutan has, in fact, replaced GDP with a measure it calls “gross national

happiness.”

Critical Thinking Questions

1. What do you think is the role of money as a determinant of a person’s satisfaction at work and

with life in general? Should organizations worry about this issue? Explain.

2. As discussed in this chapter, firms vary widely on the extent to which they emphasize money as

an incentive. Do you think an emphasis on financial incentives is good or bad?

Explain.

3. For the past 90 years or so, job evaluation as a compensation tool has been designed to assess

the value of each job rather than to evaluate the person doing the job, prompting a relatively

flat pay schedule for all incumbents in a particular position. Some HR experts believe that the

emerging trend is for pay inequality to become “normal.” Employers are using variable pay to

lavish financial resources on their most prized employees, creating a kind of corporate star

system. “How do you communicate to a workforce that isn’t created equally? How do you treat

a workforce in which everyone has a different deal?” asks Jay Schuster of Los Angeles–based

compensation consultants Schuster- Zingheim & Associates, Inc. If you were asked these

questions, how would you answer them? Given the issues just discussed in this case, what