Relativity and How it Can Make You Unhappy

May 12, 2010          Comments (3)


Relativity helps us make decisions in life. But it can also make us unhappy.

Ever wonder why top executives and CEO’s of public companies make so much money?

In 1993 federal securities regulators forced companies, for the first time, to disclose details about the pay and perks of their top executives. The idea was that once pay was out in the open, boards would be hesitant to give executives ludicrous salaries and benefits. The purpose of this was to curb the rapid rise of executive compensation. Regulation, legislation, nor shareholder pressure had been able to stop it so they thought this was the perfect solution.

Check this: in 1976 the average CEO was paid 36 times as much as the average worker. By 1993, the average CEO was paid 131 times as much.

But guess what happened? Once salaries became public information, the media regularly ran stories ranking CEOs by pay. Rather than suppressing the perks, the publicity had the CEOs in America comparing their pay with that of other CEOs.

In response, executives’ salaries skyrocketed. The result?

Now the average CEO makes about 369 times as much as the average worker (about 3x the salary before executive compensation went public)!

It has been proven repeatedly that the link between amount of salary and happiness is not that strong. In fact, it’s rather weak. Yet, we keep pushing for more money and higher salaries. Much of that can be blamed on sheer envy.

John is happy making $1,000,000 a year as the CEO. But if he finds out Bill is making $1.1 million, he’ll be unhappy.

Pretty sad, indeed.

A study quoted in the book The Paradox of Choice gave participants hypothetical choices concerning status and asked for their preferences. For example, people were asked to choose between a) earning $50,000 a year with others earning $25,000 or b) earning twice as much, $100,000 a year but being surrounded by people earning $200,000. More than half the respondents chose the option that gave them the better relative position. That means earning $50,000 to $100,000 because they were, at $50,000 earning more than others, while at $100,000 they were earning less than others.

This means the guy buying the 911 Turbo Porsche may be doing so only because others at work have a Boxster.

Although we’re hard wired to compare, it’s who you compare yourself to that can make or break your happiness. Ideally, you wouldn’t compare yourself to anyone. Really!

But if you must compare your orange self, only compare yourself to other oranges. Are you completely self-made? Well, comparing yourself to those who aren’t is just silly.

A wise man once said, “Never compare your inside to someone else’s outside.”

Along with envy comes the desire to stand out, and on the contrary not wanting to stand out (read: keeping up with the Joneses).

This leads to signaling and conspicuous spending which is fascinating, and one that I’ll explore in my next post.

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