Department of Economics

A self-serving bias occurs when people subconsciously alter their perceptions about what is fair or right in a manner that serves their own interests. Perceptions of what is “a fair day’s work for a fair wage” may well vary according to one’s role in the employment relationship. While it is clear that employee satisfaction affects job performance, and that wage affects employee satisfaction, it is not only the wage per se that determines morale, but also the perceived fairness of the received wage. Thus, it is useful to have agreement between the views of employers and employees. Some evidence from a laboratory experiment indicates these views differ significantly between participant “employers” and participant “employees.” We compare choices (hypothetical in the case of employers) for the amount of costly “effort” to provide in response to a wage that has been determined outside the employment relationship. In the field, managers must be aware of the relationship between fairness in compensation and employee morale as well as their own biases regarding the fairness reference point. Overcoming such biases requires a careful decision-making protocol in compensation decisions.