Our Egos Vs. Performance Pay : Planet Money The Lake Wobegon effect is a problem for employers who want to pay for performance.
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Our Egos Vs. Performance Pay

If you're the boss of a for-profit company, you want to make as much money as possible and keep your staff productive. One seemingly obvious way to motivate staff would be to pay people for better performance. Performance pay is being discussed in schools and on Wall Street and on Planet Money. But here's one argument against it. Answer these questions:

Are you more productive than your average co-worker?
Are you a better than the average driver?
Are you more intelligent than the average American?

Said yes to all three? Most people do.

In our story about pay this morning on Morning Edition, economist Robert Frank argues that humans have a tendency to overestimate their own achievements and capabilities in relation to others. It's called the Lake Wobegon effect. While it's great that we all feel good about ourselves, it's a problem for employers considering performance based pay. Not everyone performs above average, despite what we may think, so bosses who want to give out bonus pay for above average performance could find themselves with a serious morale issue on their hands.