On how the money illusion affects our concept of fairness (a lesson from Wall Street)

πŸ’Ž On how the money illusion affects our concept of fairness (a lesson on Wall Street bonuses)

A company is making a small profit. It is located in a community experiencing a recession with substantial unemployment but no inflation. There are many workers anxious to work at the company.

The company decides to decrease wages and salaries 7% this year.

Sixty-two per cent judged the pay cut unfair.

In an another version of the question, the community was said to have ‘substantial unemployment and inflation of 12% . . . The company decided to increase salaries only 5% this year.’ Now 78 per cent said this was acceptable. But of course the workers’ lot is almost identical in both versions. Getting a 5 per cent ‘pay rise’ when prices rise 12 per cent translates into nearly a 7 per cent cut in buying power.

One conclusion is that inflation is the Scroogish employer’s best friend. A similar principle applies to bonuses. It was judged acceptable for a troubled company to skip an annual 10 per cent bonus it had been in the habit of paying, but not to cut pay by 10 per cent for a year. (Wall Street employers, at the mercy of a volatile market, have long made use of this.)

Excerpt from:Β Priceless: The Myth of Fair Value (and How to Take Advantage of It) by William Poundstone

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