Bargaining surplus is the amount of overlap between parties’ reservation points. It is a measure of the size of the bargaining zone (what we refer to in this chapter as “the pie”). The bargaining surplus is a measure of the value that a negotiated agreement offers to both parties over the value of not reaching settlement. Skilled negotiators know how to reach agreements even when the bargaining zone is small.

Negotiated outcomes will fall somewhere in the bargaining zone. But what determines where in this range the settlement will occur? Obviously, each negotiator would like the settlement to be as close to the other party’s reservation point as possible, thereby maximizing his or her slice of the pie. In our example in Exhibit 3-1A, the seller would prefer to sell close to $14; the buyer would prefer to buy close to $11. The best possible economic outcome for the negotiator is one that just meets the counterparty’s reservation point, thereby inducing the other party to agree, but allows the focal negotiator to reap as much gain as possible. This outcome provides the focal negotiator with the greatest possible share of the resources to be divided. In other words, one person gets all or most of the pie.

The positive difference between the settlement outcome and the negotiator’s reservation point is the negotiator’s surplus (see Exhibit 3-2). The total surplus of the two negotiators adds up to the size of the ZOPA or bargaining surplus. Obviously, negotiators want to maximize their surplus in negotiations; surplus represents resources in excess of what is possible for negotiators to attain in the absence of negotiated agreement.

The fact that negotiated settlements fall somewhere in the ZOPA and that each negotiator tries to maximize his or her share of the bargaining surplus illustrates the mixed-motive nature of negotiation: Negotiators are motivated to cooperate with the other party to ensure that a settlement is reached in the case of a positive bargaining zone, but they are motivated to compete with one another to claim as much of the bargaining surplus as they can.

Many negotiators do not think about their BATNA before negotiating. Even those who think about their BATNA often do not attempt to improve it. For most negotiators, BATNAs involve some uncertainty (see Chapter 2). However, uncertainty is not a good excuse for failure to assess one’s BATNA. Nothing can help a negotiator get a bigger slice of the pie than having a great BATNA.

The risk a negotiator takes from not accurately assessing his or her BATNA prior to negotiation is that the negotiator will be unduly influenced by the counterparty. Consequently, negotiators should spend a considerable amount of time attempting to improve their BATNA before entering into a negotiation.

Do not reveal your BATNA or your reservation price during the course of negotiation, even in the friendliest of situations. If you do, the counterparty has no incentive to offer you more. In only two circumstances do we think it is appropriate to truthfully reveal your reservation price:

Negotiators can use a variety of tactics to garner information that may reveal information about the counterparty’s alternatives.

Be careful when the other party discloses, however. When the counterparty discloses his or her BATNA at the outset of the negotiation, negotiators actually make less demanding offers, disclose more truthful information, and settle for less profit than when the counterparty does not disclose a BATNA.¹²

Your aspiration, or target point, defines the upper limit on what you can get in a negotiation. Because you will usually never get more than your first offer, your first offer represents an important anchor point in the negotiation.

According to Raiffa, the final outcome of any negotiation is usually the midpoint between the first two offers that fall within the bargaining zone.¹³ For this reason, it does not make sense to make offers that are wildly outside the bargaining zone. When we use the first offer made by each party as a measure of his or her aspirations, those aspirations or target points determine the “final demands” made by negotiators, more so than do BATNAs.¹⁴ Negotiators who set high aspirations end up with more of the pie than those who set lower aspirations. Negotiators whose aspirations exceed those of the counterparty get more of the bargaining zone.¹⁵ For example, negotiators who have unattractive reservation points and high aspirations demand more from their opponents than do negotiators with attractive BATNAs and low aspirations. Buyers who set more ambitious aspirations achieve better economic outcomes; however, the sellers they are dealing with regard them to be less likeable, and as a result they are less willing to cooperate with them in the future.¹⁶ When negotiators make proposals that the other party considers extreme, it may cause the chilling effect. Making an extreme offer is a risky strategy because the recipient may be offended and walk away from the table. Both low- and high-power negotiators are equally offended by extreme offers, but it is low-power negotiators who walk away.¹⁷ For these reasons it is strategically wise to make your first offer slightly lower than the other party’s reservation point, and then you can bargain up to their reservation point. Most people are not going to immediately accept your first offer, but they ultimately might accept an offer that is equivalent to their reservation point.

Setting specific, challenging, and difficult goals results in greater profit than does setting easy or nonspecific goals.¹⁸ Nonspecific or easy goals lead to suboptimal, compromise agreements. High aspirations exert a self-regulating effect on negotiation behavior. Negotiators who are assigned easy goals tend to set harder new goals; however, in spite of adjustments, their new goals are significantly easier than the goals chosen by the difficult-goal negotiators. Thus, it is to a negotiator’s advantage to set a high, somewhat difficult aspiration point early in the negotiation. The combination of high goals and cooperation is associated with the highest outcomes.¹⁹ In one investigation, negotiators who set goals that were extremely difficult achieved better negotiation outcomes.²⁰

When a negotiator focuses on his or her target point during negotiation, this increases the value of the outcome he or she ultimately receives.²¹ Consider two types of negotiators: Promotion-focused negotiators conceptualize goals as ideals and opportunities; conversely, prevention-focused negotiators conceptualize goals as obligations and necessities. Promotion-focused negotiators who focus on “ideals” rather than “oughts” do better in terms of slicing the pie.²² Negotiators who focus on their accomplishments, hopes, and aspirations claim more resources than negotiators who focus on avoiding negative outcomes, holding constant their actual economic positions.²³ The impact of promotion and prevention focus depends on the aggressiveness of the negotiator’s economic aspirations: Prevention-focused negotiators who set goals in the upper end of the ZOPA are less likely to concede and outperform promotion-focused negotiators.²⁴ Promotion and prevention affect subjective outcomes as well. Negotiators who focus on ideals do not feel as satisfied as negotiators who focus on their reservation point or BATNA.²⁵ This is known as the goal-setting paradox. ²⁶ Thus, focusing on your target will lead to an attractive outcome, but it may not feel satisfying. In contrast, focusing on reservation points leads people to do worse but feel better. If negotiators think about their BATNA after the negotiation, they feel better.²⁷

The winner’s curse occurs when the negotiator’s first offer is immediately accepted by the counterparty. Immediate acceptance signals that the negotiator did not set his or her aspirations high enough. Furthermore, we caution negotiators to avoid a strategy known as boulwarism. Boulwarism is named after Lemuel Boulware, former CEO of General Electric, who believed in making one’s first offer one’s final offer. This strategy engenders hostility from the counterparty.

Another piece of advice: Do not become “anchored” by your reservation point. Many negotiators who assess their BATNA and set an appropriate reservation point fail to think about their aspiration or target point. Consequently, the reservation point acts as a psychological anchor and, in most cases, people make insufficient adjustments—they do not set their target high enough.

Folklore dictates that negotiators should let the counterparty make the first offer. However, there is no scientific support for this advice. In fact, the party who makes the first offer obtains a better final outcome.²⁸ First offers act as an anchor point and correlate at least .85 with final outcomes.²⁹

Negotiators need to consider a number of factors when making an opening offer. First and foremost, an opening offer should not give away too much of the bargaining zone. Second, many people worry they will “insult” the other party if they open too high (if they are selling) or too low (if they are buying). However, the fear of insulting the other party and souring the negotiations is more apparent than real. Indeed, people’s perceptions of how assertive they can be with others are notably lower than what others actually believe.³⁰

The first offer that falls within the bargaining zone acts as a powerful anchor point in negotiation. Recall the example of people’s Social Security numbers affecting estimates of the number of physicians in Manhattan. That was a case of insufficient adjustment from an arbitrary anchor. Making the first offer protects negotiators from falling prey to a similar anchoring effect when they hear the counterparty’s offer. Ideally, a negotiator’s first offer acts as an anchor for the counterparty’s counteroffer.

Your first offer should not be a range. Employers often ask prospective employees to state a range in salary negotiations. Do not fall victim to this bargaining ploy. By stating a range, you give up precious bargaining surplus. The counterparty will consider the lower end of the range as your target and negotiate down from there. A far better strategy is to respond to the counterparty’s request for a range by making several offers that are all equally satisfying to you.

One more thing about making the first offer: If you have made an offer, then you should expect to receive some sort of counteroffer or response. Once you put an offer on the table, be patient. It is time for the counterparty to respond. In certain situations, patience and silence can be important negotiation tools. Many negotiators make what we call premature concessions—they make more than one concession in a row before the other party responds or counteroffers. Always wait for a response before making a further concession. For example, Lewis Kravitz, an Atlanta executive coach and former outplacement counselor, advises patience and knowing when not to speak in the heat of negotiations. In one instance, he was coaching a young man who had just been fired by his team. The young man felt desperate and told Kravitz he was willing to take a $2,000 pay cut and accept $28,000 for his next job. Kravitz told the man to be quiet at the bargaining table and let the prospective employer make the first offer. At the man’s next job interview, the employer offered him $32,000, stunning the overjoyed job seeker into momentary silence. The employer interpreted the silence as dissatisfaction and increased the offer to $34,000 on the spot.³¹

If the counterparty makes an offer, then the ball is in your court, and it is wise to make a counteroffer in a timely fashion. It is unwise to accept the first offer. Negotiators whose first offers are accepted engage in counterfactual thoughts about how they could have done better (e.g., “What could have been different?”) and are less satisfied than negotiators whose first offers are not immediately accepted.³² Consider how Dell’s board of directors immediately countered Michael Dell’s “lowball” opening offer. In August of 2012, Michael Dell approached the board of the computer company he founded from his college dorm room in 1984. His proposition was to take Dell Inc. private and that he was the right person to do so. His first offer was a firm $12 a share. The board flatly rejected it and countered with $24/share. Over several months, rival bidders extended better offers over Michael Dell’s. In the fall of 2013, Michael Dell and partner Silver Lake raised their offer to $13.75/share and tacked on a special-dividend sweetener. The board accepted the offer.³³

Counteroffers do two things. First, they diminish the prominence of the counterparty’s initial offer as an anchor point in the negotiation. Second, they signal your willingness to negotiate. It is essential that you plan your opening offer before hearing the other party’s opening—otherwise you risk being anchored by the other party’s offer. In one investigation, some negotiators who received an offer from the other party were coached to focus on information that was inconsistent with that offer; others were not given such coaching.³⁴ The result? Thinking about the opponent’s BATNA or reservation price or even one’s own target point completely negates the powerful anchoring impact that the other party’s first offer might have on you. Above all, do not adjust your BATNA based upon the counterparty’s offer, and do not adjust your target. It is extremely important not to be “anchored” by the counterparty’s offer. An effective counteroffer moves the focus away from the other party’s offer as a reference point.

Concessions are the reductions that a negotiator makes during the course of a negotiation. Most negotiators expect to make concessions during negotiation. (One exception is the bargaining style known as boulwarism, presented previously.)

Negotiators need to consider three things when formulating counteroffers and concessions: (1) the pattern of concessions, (2) the magnitude of concessions, and (3) the timing of concessions.

The way in which an offer is presented affects the course of negotiations. Ideally, present a rationale that is objective and invites the counterparty to buy into your rationale. If your proposals are labeled as “fair,” “even splits,” or “compromises,” they carry more impact. Conversely, if your facts can be easily counterargued by the other party, you will not benefit by making arguments.⁴¹ Thus, it is important to be more informed than the other party. For example, agent Scott Boras, who represents many of the highest-paid baseball players in the game, totes an encyclopedic-sized binder detailing the accomplishments of every one of his clients, including seemingly obscure charts of a player’s potential impact on the team’s bottom line. When highly prized client Prince Fielder entered free agency, Boras produced a 73-page binder of statistics, personal information, and intangibles about Fielder, which eventually netted the 27-year-old player a 9-year, $214 million contract with the Detroit Tigers.⁴²

A variety of norms of fairness exist and negotiators usually focus on norms of fairness that serve their own interests.⁴³ Merely making reference to fairness can often give a negotiator an advantage. Consider the top-rated comedy sitcom Modern Family that won more than 30 awards in four years, including an Emmy for Outstanding Comedy series three years in a row. The actors and actresses believed they deserved their fair share of the profit the show made. So in 2012, they negotiated for a raise from $65,000 an episode to $150,000 per episode as well as adding an eighth year onto their seven-year contract.⁴⁴

A common technique is the even split between whatever two offers are currently on the negotiation table. The concept of the even split has an appealing, almost altruistic flavor to it. So what is the problem with even splits? The problem is that they are based on values arrived at arbitrarily. Consider a car-buying situation. Suppose you initially offered $33,000 for the car, then $34,000, and finally, $34,500. Suppose the salesperson initially requested $35,200, then reduced it to $35,000, and then to $34,600. The salesperson then suggests you split the difference at $34,550, arguing that an even split of the difference would be “fair.” However, the pattern of offers up until that point was not “equal” in any sense. You made concessions of $1,500; the salesperson made concessions of $600. Further, even concessions that were of equal magnitude do not guarantee that the middle value is a “fair” value. It behooves a negotiator to begin with a high starting value and make small concessions. Often, the person who suggests the even split is in an advantageous position. Before accepting or proposing an even split, make sure the anchors are favorable to you.

No. If you reveal your reservation price, be prepared for the other party to offer you your reservation price—but not more. Some negotiators reveal their reservation point to demonstrate that they are bargaining in good faith and trust the other party. These negotiators rely on the counterparty’s goodwill and trust their opponent not to take advantage of this information. There are more effective ways to build trust. For example, you could show a genuine concern for the needs and interests of the other party. The purpose of negotiation is to maximize your surplus, so why create a conflict of interest by “trusting” the other party with your reservation point?

The most valuable piece of information you can have about the counterparty is his or her reservation point. This knowledge allows you to make the counterparty an offer that barely exceeds his or her reservation point and to claim the entire bargaining surplus for yourself. However, you should assume the counterparty is as smart as you are and therefore not likely to reveal his or her reservation point.

If negotiators do well for themselves by not revealing their reservation point, perhaps they might do even better by lying, misrepresenting, or exaggerating their reservation point. However, lying is not a good idea for three important reasons.

First, lying is unethical. Lewicki and Stark identified five types of behavior that some consider to be unethical in negotiations, including traditional competitive bargaining (e.g., exaggerating an initial offer or demand); attacking an opponent’s network (e.g., attempting to get your opponent fired or threatening to make him or her look foolish); misrepresentation and lying (e.g., denying the validity of information your opponent has that weakens your negotiating position even though the information is valid); misuse of information (e.g., inappropriate information gathering), and false promises (e.g., offering to make future concessions that you know you won’t follow through on, and guaranteeing your constituency will uphold the settlement, even though you know they won’t).⁴⁵

Our examination of lying revealed that even though 40% of people believed that others in their network lied over a 10-week period, these same people admitted lying only about 22% of the time. Such egocentric perceptions often lead to lawsuits. After Bank of America reached a $150 million settlement with the Securities and Exchange Commission, they were accused of lying to shareholders in 2008 to speed the purchase of Merrill Lynch.⁴⁶

In other cases, negotiators are quick to assume that others have deceived them. For example, the negotiations to prevent 167 Newark, New Jersey police officers from being laid off broke down when conflict arose between the local Fraternal Order of Police and two members of its executive board over whether $9.5 million in temporary cuts to save the positions had actually been agreed upon.⁴⁷ The negotiators involved most likely held self-serving views.

Second, lying creates a face saving problem if the other party calls your bluff. How do you get back to the table without losing face? Indeed, the most common lie in negotiation is, “This is my final offer.” It is embarrassing to continue negotiating after making such a statement. Do not back yourself into a corner.

Third, lying hurts your reputation. People in the business community develop reputations that quickly spread via electronic mail, telephone, and word of mouth. People who have a reputation as tough are treated more competitively by others and have more difficulty claiming resources. “Deceptive cheap talk” that is discovered by the other party negatively impacts a negotiator’s outcomes.⁴⁸ People who discover that they have been deceived may seek retribution, even though doing so may be costly to them. Consider, for example how Felicity Loudon, the heiress of Cadbury, vowed to seek retribution following the hostile takeover bid of Cadbury by Kraft. Kraft launched a hostile takeover bid for Cadbury in December 2009. The move provoked a massive public reaction with a campaign by The Mail to “Keep Cadbury British.” But in January of 2013, Cadbury shareholders voted to accept an £11.5 billion offer from Kraft. Felicity Loudon vehemently declared that she would start her own company in retaliation, “I can’t accept that Cadbury has gone to America. To a plastic cheese company. I won’t accept it. I want to start again. I want to make chocolate and I’m jolly well going to do it.”⁴⁹ Experienced negotiators are able to extract more of the pie for themselves, but not when they have a reputation for being “distributive.”⁵⁰ Misrepresenting your reservation price is a poor substitute for preparation and developing strategy.

No. Assuming that the counterparty is reasonably intelligent, motivated, and informed (like you), he or she is not likely to fall prey to this transparent negotiation ploy. Such attempts may actually backfire, entrenching the counterparty more steadfastly in his or her position. Furthermore, you want to discourage the other negotiator from using such influence tactics.

Some negotiators are inclined to use scare tactics such as, “If you do not sell your house to us, there will not be another buyer” or “You’ll regret not buying this company from me in 10 years when I am a billionaire.” Scare tactics were used by both China and U.S. negotiators when discussing cyber security. Washington officials and cyber-security experts claimed that hackers working for the Chinese government attacked corporate America, going via the digital backdoor to steal technology blueprints, pricing documents, and even maps of the nation’s power supply. In 2007, Chinese technology company Huawei was forced to drop a joint $2.2 billion bid for Silicon Valley firm 3Com after a campaign by U.S. lawmakers. And, House of Representatives intelligence committee urged U.S. companies to avoid doing business with Huawei in case the Chinese government used their equipment for spying. Huawei’s chairman, Sun Yafang claimed their company was caught in the middle of a political war between the United States and China to fuel U.S. economic interests.⁵¹ However, scare tactics may not always be effective.

The phrase “This is my final offer” has much more impact when said later in a negotiation. Making an irrevocable commitment such as a “final offer,” should be done only when you really mean it and are prepared to walk away from the bargaining table. Of course, you should only walk away from the bargaining table if your BATNA is more attractive than the counterparty’s offer. Intimidating the other party is risky. It is difficult to make “binding” commitments that are credible. Consider the threat that Newfoundland and Labrador Premier Danny Williams made to Exxon Mobil. Williams was negotiating a multibillion-dollar Hebron offshore oil deal. Williams based his position on the importance of an adequate deal to Newfoundlanders, committed to it, and challenged oil companies, “Well, fine. Go somewhere else. We’ll still have our oil.” Eventually, Exxon Mobil and Chevron capitulated and agreed to Williams’s terms.⁵² In this situation, the threat worked. However, in other situations threats don’t work, such as in the case of Yelp. In 2009, Google and Yahoo! each tried to purchase Yelp, the popular review site. Google offered Yelp $500 million, but Yahoo! came in with a financially more attractive offer of nearly $750 million. Yelp negotiators told Google they had received a better offer from Yahoo!, but Google held steady and did not top the Yahoo! bid. However, Yelp had no intention of working with Yahoo! as executives deemed the company a poor fit. Ultimately, Yelp came away with no deal and no money. The underlying message is: Do not reject an offer if you are not prepared to walk away. In this case, Yelp was not prepared to walk away.⁵³

Negotiators often use one of three fairness principles when it comes to slicing the pie: equality, equity, and need:⁶¹

1. Equality rule, or blind justice, prescribes equal shares for all. Outcomes are distributed without regard to inputs, and everyone benefits (or suffers) equally. The U.S. education system and legal systems are examples of equality justice: Everyone receives equal entitlement.

2. Equity rule, or proportionality of contributions principle, prescribes that distribution should be proportional to a person’s contribution. The free market system in the United States is an example of the equity principle. In many universities, students bid for classes; those who bid more points are more entitled to a seat in the course.

3. Needs-based rule, or welfare-based allocation, states that benefits should be proportional to need. The social welfare system in the United States is based on need. In many universities, financial aid is based on need.

Different fairness rules apply in different situations.⁶² For example, most of us believe that our court/penal justice system should be equality based: Everyone should have the right to an equal and fair trial regardless of income or need (equality principle). In contrast, most believe that academic grades should be assigned on the basis of an equity-based rule: Students who contribute more should be rewarded with higher marks (equity principle). Similarly, most people agree that disabled persons are entitled to parking spaces and easy access to buildings (needs principle). However, sometimes fierce debates arise (e.g., affirmative action, with some arguing it is important for people who have been historically disadvantaged to have equal access and others arguing for pure equity-based, or merit-only rules).

The goals involved in a negotiation situation often dictate which fairness rule is employed.⁶³ For example, if the goal is to minimize waste, then a needs-based or social welfare policy is most appropriate.⁶⁴ If the goal is to maintain or enhance harmony and group solidarity, equality-based rules are most effective.⁶⁵ If the goal is to enhance productivity and performance, equity-based allocation is most effective.⁶⁶

Similarly, a negotiator’s relationship to the other party strongly influences the choice of fairness rules. When negotiators share similar attitudes and beliefs, when they are physically close to one another, or when it is likely they will engage in future interaction, they prefer equality rule. When the allocation is public (others know what choices are made), equality is used; when allocation is private, equity is preferred. Friends tend to use equality, whereas nonfriends or acquaintances use equity.⁶⁷ Further, people in relationships with others do not consistently employ one rule of fairness but rather, use different fairness rules for specific incidences that occur within relationships. For example, when people in relationships are asked to describe a recent incident from their own relationship that illustrates a particular justice principle (equity, equality, or need), needs-based fairness is related to incidents involving nurturing and personal development, whereas equity and equality-based fairness are related to situations involving the allocation of responsibilities.⁶⁸ In general, equality-based pie-slicing strategies are associated with more positive feelings about the decision, the situation, and one’s partner.

Fairness rules also depend on whether people are dealing with rewards versus costs (recall our discussion about the framing effect in Chapter 2). Equality is often used to allocate benefits, but equity is more commonly used to allocate burdens.⁶⁹ For example, in one investigation people were involved in a two-party negotiation concerning a joint project.⁷⁰ In the benefit-sharing condition, negotiators were told that their joint project produced a total earning of 3,000 GL (a hypothetical monetary unit) and their task was to reach an agreement about how to divide this amount with their partner. Participants were told they had personally incurred a cost of 1,350 GL for this project and their final profit would be determined by subtracting 1,350 from the negotiated agreement amount. In the cost-sharing condition, the situation was exactly the same except participants were told they had personally invested 1,650 GL. Thus, the bargaining situation was identical in both situations, with the exception of the personal investment. Obviously, an equal split of 3,000 GL would mean 1,500 GL apiece, which would result in a gain in the benefit condition and a loss in the cost condition. Negotiators were more demanding and tougher when bargaining how to share costs than benefits. Furthermore, fewer equal-split decisions were reached in the cost condition.

The selection of fairness rules is also influenced by extenuating circumstances. Consider for example, an economically disadvantaged person who attains an advanced degree. A person who overcomes external constraints is more highly valued than a person who does not face constraints but contributes the same amount. When a situation is complex, involving multiple inputs in different dimensions, people are more likely to use the equality rule. Thus, groups often split dinner bills equally rather than compute each person’s share. This approach can lead to problems. Group members aware of the pervasive use of equality may actually spend more individually. No group member wants to pay for more than he or she gets; if people cannot control the consumption of others, they consume more. Of course, when everyone thinks this way, the costs escalate leading to irrational group behavior (a topic we discuss in Chapter 11 on social dilemmas).

Different fairness rules are a potential source of conflict and inconsistency.⁷¹ For example, people who are allocating resources choose different rules of fairness than do people who are on the receiving end. Allocators often distribute resources equally, even if they have different preferences. In contrast, recipients who have been inequitably but advantageously treated, justify their shares—even when they would not have awarded themselves the resources they received.⁷²

Social comparison is an inevitable fact of life in organizations and relationships. How does someone’s higher salary, larger office, special opportunities, or grander budget affect us? Are we happy for other people—do we bask in their glory when they achieve successes—or are we threatened and angry? Negotiators who feel more envious about their counterparty’s outcomes, actually perform better in negotiations than those who do not feel envy.⁷³

When we compare ourselves to others, we consider the relevance of the comparison to our self-concept. People have beliefs and values that reflect their central dimensions of the self. Some dimensions are highly self-relevant; others are irrelevant. It all depends on how a person defines himself or herself. The performance of other people can affect our self-evaluation, especially when we are psychologically close to them. When we observe someone who is close to us performing extremely well in an area that we highly identify with, our self-evaluation is threatened. Such “upward” comparisons can lead to envy, frustration, anger, and even sabotage. Upon hearing that a member of one’s cohort made some extremely timely investments in companies that have paid off multifold and is now a multimillionaire, people who pride themselves on their financial wizardry probably feel threatened. The fact that our colleague excels in an area that we pride ourselves is unsettling. When another person outperforms us on a behavior that is irrelevant to our self-definition, the better her or his performance and the closer our relationship, the more we take pride in his or her success.

When it comes to pay and compensation, people are more concerned about how much they are paid relative to other people than about the absolute level of their pay (see Exhibit 3-3 for an example of social comparison).⁷⁴

With whom do people compare themselves? Three social comparison targets may be distinguished: upward comparison, downward comparison, and comparison with similar others.

1. Upward comparison occurs when people compare themselves to someone who is better off, more accomplished, or higher in status. The young entrepreneur starting his own software company may compare himself to Bill Gates. Oftentimes, people compare themselves upward for inspiration and motivation.

2. Downward comparison occurs when people compare themselves to someone who is less fortunate, able, accomplished, or lower in status. For example, when a young manager’s marketing campaign proves to be a complete flop, she may compare herself to a colleague whose decisions led to the loss of hundreds of thousands of dollars. Downward comparison often makes people feel better about their own state.

3. Comparison with similar others occurs when people choose someone of similar background, skill, and ability with whom to compare themselves. Comparison with similar others is useful when people desire to have accurate appraisals of their abilities.

What drives the choice of the comparison to others? A number of goals and motives may drive social comparison, including the following:

1. Self-improvement: People compare themselves with others who can serve as models of success.⁷⁵ For example, a beginning chess player may compare his or her skill level with a grand master. Upward comparison provides inspiration, insight, and challenge, but it can also lead to feelings of discouragement and incompetence.

2. Self-enhancement: The desire to maintain or enhance a positive view of oneself may lead people to bias information in self-serving ways. Rather than seek truth, people seek comparisons that show them in a favorable light. People make downward comparisons with others who are less fortunate, less successful, and so forth.⁷⁶

3. Accurate self-evaluation: The desire for truthful knowledge about oneself (even if the outcome is not favorable).

People make judgments about what is fair based on what they are investing in the relationship and what they are getting out of it. Inputs are investments in a relationship that usually entail costs. For example, the person who manages the finances and pays the bills in a relationship incurs time and energy costs. An output is something that a person receives from a relationship. The person who does not pay the bills enjoys the benefits of a financial service. Outputs, or outcomes, may be positive or negative. In many cases, A’s input is B’s outcome, and B’s input is A’s outcome. For example, a company pays (input) an employee (outcome) who gives time and expertise (input) to further the company’s goals (outcome). Consider the negotiations between the Writers Guild of America (WGA) and its employers. Employers wanted to extend the WGA’s existing contract that pays writers residuals based on reuse of their works. However, the writers were frustrated with their compensation and rejected the employers’ proposal. The writers created a “Contract Bulletin” that included eight charts emphasizing rising financial profitability at media companies: Growth was evident in almost every single measure of economic performance, including gross revenues in every segment, excellent operating profits, and rising share prices for all six major entertainment companies. In short, the writers argued that their “inputs” were worth more than what the employers gave them.⁷⁷

Equity exists in a relationship if each person’s outcomes are proportional to his or her inputs. Equity, therefore, refers to equivalence of the outcome/input ratio of parties; inequity exists when the ratio of outcomes to inputs is unequal. Equity exists when the profits (rewards minus costs) of two actors are equal.⁷⁸ However, complications arise if two people have different views of what constitutes a legitimate investment, cost, or reward and how they rank each one. For example, consider salaries paid to players in the National Basketball Association (NBA). With the starting players taking the greatest salaries (capped at a fixed amount per team), little is left over to pay the last three or four players on a 12-person team roster. Similarly, the Dodd-Frank law requires companies to report CEO compensation as a multiple of median worker pay, revealing the actual ratio between CEO pay and employee pay at individual companies. The average U.S. CEO makes 273–354 times as much as the median worker; in France, that multiple is 104, in Japan it’s 67. John Mackey, cofounder and co-CEO of Whole Foods, earns 19 times more than the average whole foods worker and claims that large inequities lead to worse employee morale and reduced loyalty.⁷⁹

Equity exists when a person perceives equality between the ratio of his or her own outcomes (O) to inputs (I) and the ratio of the other person’s outcomes to inputs, where a and b represent two people:⁸⁰

However, this equity formula is less applicable to situations in which inputs and outcomes might be either positive or negative. The basic equity formula may be reconstructed as follows:

This formula proposes that equity prevails when the disparity between person a’s outcomes and inputs and person b’s outcomes and inputs are equivalently proportional to the absolute value of each of their inputs. The numerator is “profit,” and the denominator adjusts for positive or negative signs of input. Each k takes on the value of either +1 or −1, depending on the valence of participants’ inputs and gains (outcomes − inputs).

Suppose that you were hired by company X last year with an annual salary of $85,000. You felt happy about your salary until you learned that your colleague at the same company, whom you regard to be of equivalent skill and background, is paid $5,000 more per year. How do you deal with this inequity? When people find themselves in an inequitable relationship, they become distressed; the greater the perceived inequity, the more distressed people feel. Distress drives people to attempt to restore equity.

People who believe they are underpaid feel dissatisfied and seek to restore equity.⁸¹ For example, underpaid workers reduce their level of effort and productivity to restore equity,⁸² and in some cases they leave organizations characterized by inequity to join an organization in which wages are more fairly distributed, even if they are less highly paid in absolute terms.⁸³ Consider what happened when two vice presidents of a major Fortune 100 company were promoted to senior vice president at about the same time. Both of them moved into new offices, but one of them suspected an inequity. He pulled out blueprints and measured the square footage of each office. His suspicions were confirmed when it turned out the other guy’s office was bigger than his by a few feet. A former employee said, “He blew a gasket.” Walls were moved, and his office was reconfigured to make it as large as his counterpart’s.⁸⁴

People use the following six means to eliminate the tension arising from inequity:⁸⁵

1. Alter the inputs. The senior VP could work less hard, take on fewer projects, take more days off.

2. Alter the outcomes. The senior VP could make his office bigger—which he did.

3. Cognitively distort inputs or outcomes. The senior VP could minimize the importance of his contributions and maximize the perceived value of his office—for example, by deciding that his office was quieter than that of his counterpart.

4. Leave the situation. The senior VP could quit his job.

5. Cognitively distort either the inputs or the outcomes of an exchange partner. The senior VP may view the other VP as contributing more, or perhaps regard the big office to be less attractive than it actually is.

6. Change the object of comparison. The senior VP may stop comparing himself to the other senior VP and start comparing himself to someone else in the company.

The use of the first two strategies depends on whether the person has been over- or underrewarded. Overrewarded individuals can increase their inputs or decrease their outcomes to restore equal ratios, whereas underrewarded people must decrease their inputs or increase their outcomes. For example, people work harder if they think they are overpaid. Conversely, people may cheat or steal if they are underpaid.⁸⁶

Given the various methods of restoring equity, what determines which method will be used? People engage in a cost-benefit analysis and choose the method that maximizes positive outcomes. Usually, this method minimizes the necessity of increasing any of one’s own inputs that are difficult or costly to change and also minimizes the necessity of real changes or cognitive changes in inputs/outcomes that are central to self-concept. Simply put, it is often easier to rationalize a situation than to do something about it. Further, this type of change minimizes the necessity of leaving the situation or changing the object of social comparison once it has stabilized. Thus, we are not likely to ask for a salary cut if we think we are overpaid, but we are more inclined to regard the work we do as more demanding. (See Exhibit 3-4 for an examination of factors that can cause reactions to inequity.)

The equity drive is so strong that people who are denied the opportunity to restore equity will derogate others, thereby restoring psychological equity. If distortion must occur, people focus on the other person’s inputs or outcomes before distorting their own, especially if such distortion threatens their self-esteem. Leaving the situation and changing the object of comparison involves the highest costs because they disrupt the status quo and violate justice beliefs.

In addition to their slice of the pie, people are concerned with the way resources are distributed.⁸⁷ People evaluate not only the fairness of outcomes but also the fairness of the procedures by which those outcomes are determined. Listening to the other party, treating them with respect, and explaining oneself is related to outcome satisfaction and the desire for future negotiations.⁸⁸ People’s evaluations of the fairness of procedures determine their satisfaction and willingness to comply with outcomes. For example, managers who educate employees (i.e., explain to them why change is occurring, such as in the case of a merger) find that it increases employee commitment to the change.⁸⁹ Employees who believe they have been mistreated are more likely to exit and exhibit work withdrawal.⁹⁰ The process of explaining decisions in a change context helps employees adapt to the change, whereas the lack of an explanation is often regarded by employees as unfair, generating resentment toward management and toward the decision.⁹¹ An investigation of 183 employees of seven private-sector organizations, each of whom had just completed relocation, revealed that perceived fairness was higher when justification was provided in the case of unfavorable change.⁹²

Consider the following situation: You and a college friend develop a potentially revolutionary (and profitable) idea for a new kind of water ski.⁹³ You spend about half a year in your dorm basement developing a prototype of the new invention. Your friend had the original idea; you developed the design and materials and assembled the prototype. The two of you talk to a patent lawyer about getting a patent, and the lawyer tells you a patent is pending on a similar product but the company will offer you $3,000 for one of the innovative features of your design. You and your friend gladly accept. What division of the $3,000 between you and your friend would you find to be most satisfying?

People’s preferences for several possible distributions of the money for themselves and the other person were assessed.⁹⁴ People’s utility functions were social rather than individual, meaning that individual satisfaction was strongly influenced by the payoffs received by the other, as well as the payoffs received by the self (see Exhibit 3-5). Social utility functions were tent-shaped. The most satisfying outcome was equal shares for the self and other ($1,500 apiece). Discrepancies between payoffs to the self versus the other led to lower satisfaction. However, social utility functions were lopsided in that advantageous inequity (self receives more than other) was preferable to disadvantageous inequity (other receives more than self). Further, the relationship people had with the other party mattered: In positive or neutral relationships, people preferred equality; in negative relationships, people preferred advantageous inequity. (See Exhibit 3-6 for an examination of different types of profiles.)

People will reject outcomes that entail one person receiving more than others and settle for a settlement of lower joint value but equal-appearing shares.⁹⁵ This arrangement is especially true when resources are “lumpy” (i.e., hard to divide into pieces), such as an Oriental rug.⁹⁶

Consider a group of three people who go out for dinner. One person orders a bottle of expensive wine, an appetizer, and a pricey main course. Another abstains from drinking and orders an inexpensive side dish. The third orders a moderately priced meal. Then the bill arrives. The wine drinker immediately suggests that the group split the bill into thirds, explaining that this approach is the simplest. The teetotaler winces and suggests that the group ask the waiter to bring three separate bills. The third group member argues that because he is a student, the two others should cover the bill, and he invites the two over to his house the next week for pizza.

This example illustrates that any situation can have as many interpretations of fairness as it has parties involved. Two people may both truly want a fair settlement, but they may have distinctly different and equally justifiable ideas about what is fair. Consider for example, “fairness opinions” that underpin mergers and acquisitions. Some are written by independent firms unconnected to the deal, but the majority aren’t.⁹⁷ Banks can rack up millions of dollars in fees by acting simultaneously as agents and appraisers, presumably fueled by self-serving interests.

Why are people self-serving? People want or prefer more than what they regard as fair (basic hedonism). In short, our preferences are more primary, or immediate, than our social concerns. People are more in touch with their own preferences than with the concerns of others. We have immediate access to our preferences; fairness is a secondary judgment. For this reason, fairness judgments are likely to be tainted by preferences. Allocating more money to ourselves is only one way that people show egocentric bias. For example, people pay themselves substantially more than they are willing to pay others for doing the same task.⁹⁸ People were asked if they worked for 7 hours and were paid $25 while another person worked for 10 hours, how much did they think the other person should get paid? Most answered that the other person should get paid more for doing more work—about $30.29 on average. Then they switched roles and asked if the other person worked for 7 hours and was paid $25 and they worked for 10 hours, what is a fair wage for them to be paid? The average response was $35.24. The difference between $35.24 and $30.29 is about $5, which illustrates the phenomenon of egocentric bias.

Egocentric judgments of fairness also emerge in other ways. For example, people select fairness rules in a self-serving fashion: When people make minimal contributions, they often prefer equality rather than equity; however, when people’s contributions are substantial, they opt for equity rather than equality.⁹⁹ Even if people agree to use the same fairness rule, they think it is fair for them to get more than others in a similar situation because they think they would have contributed more.¹⁰⁰

Another way people can engage in egocentric evaluation is to selectively weigh different aspects of the exchange situation in a way that favors themselves. Consider a situation in which participants are told how many hours they worked on a task of assembling questionnaires, as well as how many questionnaires they completed. The key dimensions are hours worked and productivity. Participants are then asked to indicate what they believe is fair payment for their work. Those who worked long hours but did not complete many questionnaires emphasize the importance of hours; in contrast, those who worked short hours but completed many questionnaires emphasize quantity completed. Thus, people emphasize the dimension that favors themselves.¹⁰¹

Appeals to equality can also be self-serving.¹⁰² At a superficial level, equality is simple. Employing equality as a division rule in practice, however, is complex because of the multiple dimensions on which equality may be established.¹⁰³ Furthermore, equality is not consistently applied. For example, when the outcome is evenly divisible by the number in the group, people will use equality more than when even division is not possible.¹⁰⁴ The problem with egocentric judgment is that it makes negotiations more difficult to resolve.

The preceding examples suggest that people immediately seize upon any opportunity to favor themselves. However, in many situations, people would ultimately benefit by not having egocentric views. Consider arbitration situations: People’s predictions of judges’ behavior are biased in a manner that favors their own side. Efforts to eliminate bias among litigants meet with virtually no success. Informing parties of the potential bias or providing them with information about the counterparty’s point of view does little to assuage biased perceptions of fairness, suggesting that egocentric biases are deeply ingrained.¹⁰⁵

People really do care about fairness but usually do not realize that they are behaving in a self-interested fashion. Egocentric judgments of responsibility and fairness are attributable to ways in which people process information. Several cognitive mechanisms allow the development of egocentric judgments:

• Selective encoding and memory. Our own thoughts distract us from thinking about the contributions of others. We rehearse our own actions and fit them into our own cognitive schemas, which facilitates retention and subsequent retrieval. If encoding mechanisms lead to self-serving judgments of fairness, then a person who learns of the facts before knowing which side of a dispute he or she is on should not be egocentric. However, the egocentric effect still emerges even when the direction of self-interest occurs subsequent to the processing of information, suggesting that encoding is not the sole mechanism producing egocentric judgment.

• Differential retrieval. When making judgments of responsibility, people ask themselves “How much did I contribute?” and they attempt to retrieve specific instances.¹⁰⁶ Because it is easier to retrieve instances involving oneself, a positive correlation exists between recall and responsibility attributions.¹⁰⁷ Not surprisingly, when people are asked to think about how much others contributed to a joint task, egocentrism decreases.¹⁰⁸ However, after considering others’ contributions to joint tasks, people report less enjoyment and lower satisfaction.

• Informational disparity. People often are not privy to the contributions made by others, which suggests that information, not goals, mediates the self-serving effect. Even when information is constant but goals are manipulated, self-serving effects emerge,¹⁰⁹ suggesting that information itself is not solely responsible for the egocentric effect.¹¹⁰

Most situations are ambiguous enough that people can construe them in a fashion that favors their own interests. One unfortunate consequence is that people develop different perceptions of fairness even when they are presented with the same evidence. Consider a strike situation in which people are provided with background information on a hypothetical teachers union and board of education. The background material is constructed so that some facts favor the teachers and other facts favor the board of education. On balance, the facts are equal. In one condition, both disputants are presented with extensive, identical background information concerning the dispute. In another condition, disputants are presented with abbreviated, much less extensive background information. Those who have extensive information are more likely to go on strikes that last longer and are more costly to both parties, compared to disputants who do not have extensive information, even though the information is identical for both sides.¹¹¹ Information, even when shared among parties, creates ambiguity and provides fertile ground for unchecked self-interest to operate.

Reducing egocentrism is not easy. In general, leading people to consider other members’ contributions to a joint task reduces self-centered judgments.¹¹² However, this can backfire by activating egoistic theories of people’s behavior and claiming more in subsequent situations.¹¹³

One of the hallmarks of a good pie-slicing heuristic is consistency or invariance across settings, time, and contacts. For example, most of us would be outraged if managers up for performance review did better if the meeting was scheduled in the morning rather than the afternoon. This example represents a clear bias of the interviewer. Fairness procedures are often inconsistent because of heuristic decision making. Heuristic judgment processes are necessary when normative decision procedures are absent or when their application would be inefficient. Unfortunately, people are typically unaware of the powerful contextual factors that affect their judgments of fairness.

Pie-slicing procedures should be clearly understood by the individuals who employ them and those who are affected by them. Group members should be able to explain the procedure used to allocate resources. This allows the procedure to be implemented with full understanding and the outcomes of the procedure to be evaluated against a clear criterion.

Pie-slicing policies should produce a choice, meaning that the allocation procedure should yield a clear decision. If the procedure does not produce such a decision, then conflict may erupt among group members who try to identify and implement a decision post hoc.

Pie-slicing procedures should be justifiable to other parties. A fairness rule may be consistent, simple, and effective, but if it cannot be justified it is not likely to be successful. For example, suppose that a manager of an airline company decides that raises will be based upon hair color: Blondes get big raises, brunettes do not. This policy is consistent, simple, and effective but hardly justifiable.

Group members should agree upon the method of allocation. Effective pie-slicing procedures are often internalized by group members, and norms act as strong guidelines for behavior and decision making in groups. Because social justice procedures often outlive current group members, new members are frequently indoctrinated with procedures that the group found useful in the past.¹¹⁶

The pie-slicing procedure should be applicable to a wide variety of situations. Procedures and norms develop when intragroup conflict is expected, enduring, or recurrent, and effective policy therefore specifies outcome distribution across situations.

To increase the likelihood that negotiators will follow through with their agreements, the pie-slicing procedure should be satisfying to all. In 2012, Apple and HTC settled their patent litigation, which required HTC to pay $6–$8 to Apple for every Android-equipped handset sold. Both sides were happy to have reached an agreement, and HTC CEO was stated saying, “We can focus on innovation instead of litigation.”¹¹⁷