The informal contract

Some people deliberately work in places where they get paid less than normal.

Some economic theories would have us believe that’s impossible, but there’s more to compensation than a paycheck or benefits. Often, people will work for less money — and if you want to take advantage of that, you need to know about the informal contract that keeps them attracted to their jobs.

There are many reasons people stay with a job when they could make more somewhere else. Some people believe in the mission of the organization, particularly at nonprofits, government jobs, and in education. Even at for-profit companies, people can work for less because they enjoy the challenge of their work, their personal freedom, co-workers, or even the company or division mission. Workers may take great pride in their employer if the product is of high quality, or does something to help people. A major attractor is a group’s social system — people don’t want to leave because they’d miss the people they work with.

It’s easy to overlook these bonds when one is pursuing savings or efficiency. To keep these people, though, the organization has essentially signed an informal contract — agreeing to give people freedom, purpose, or social rewards in lieu of a competitive salary.

Examples:

At a distributor, new employees were told, “It’s great to work here, but the pay stinks.” People who were motivated by money went to a competitor; and many employees came from that competitor, because they wanted better working conditions more. One company had people who cared more about the money, and the other had people who cared more about the working environment.
One government leader gave up massive compensation to take his new job. He asked other successful people to take similar pay cuts to work for the government, telling them it was time to give back. To keep them there, the leader had to stay rigidly honest and avoid any personal benefit from his position; but in return he was able to bring in hard-working, well-experienced people who would be very hard to bribe.
At one college, where people were “underpaid” by around 20% (one fifth of their salary), most of those surveyed said they stayed because they wanted to work in an academic environment.

It’s easy, and dangerous, to violate the informal contract. We saw a lot of anger throughout one company when a seemingly unimportant approval process was added, for minor purchases; “unnecessary approvals” was seen as a violation of the contract, since relative autonomy and trust were part of the reason people worked there for less. (The policy also did nothing to actually cut costs.)

When people choose a workplace because of the non-financial rewards, such as a supportive environment, challenging and important work, or pleasant co-workers, then non-financial factors are important sources of motivation and dissatisfaction. Increasing feedback, communications, and engagement can have larger impacts than salary boosts — while violating the informal contract carries its own penalties.