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How “overcompensation” can backfire

How overcompensation can backfireSuppose a total stranger bumps into you carelessly and knocks your tablet computer to the ground, causing £100 damage, but offers to provide you £1,000 for your loss and troubles. A nice gesture, one might say, something that could build the victim’s admiration and trust for the perpetrator.

But research by a team including David De Cremer, a professor at Cambridge Judge Business School and the new KPMG chair in Management Studies, finds that such overcompensation usually backfires: compared to compensation equal to the loss, overcompensation offers no benefits in building trust and cooperation in the future, and “even provokes negative outcomes” such as suspicion and guilt – potentially damaging any future relationship between the two people.

A blog item on the Harvard Business Review website recently featured the study, What Money Can’t Buy: The Psychology of Financial Overcompensation, published in the Journal of Economic Psychology.

“The financial crisis was a huge inspiration for this study, as we wanted to look at the issues of compensation and apology,” says Professor De Cremer, who joined Cambridge Judge this summer after teaching in recent years at London Business School, China Europe International Business School in Shanghai and Rotterdam School of Management at Erasmus University in the Netherlands.

What we found is that people prefer equal compensation to make up for their monetary loss, if overcompensation is really big, people see it as insincere, too good to be true.

Overcompensation can help rebuild cooperation but no more than equal compensation, the study found, and leads to lower levels of trust in the perpetrator because humans naturally tend to evaluate the “moral orientation” of a person providing overcompensation to be lower.

In some cases, when the person harmed has severe financial difficulties – after declaring bankruptcy, for example – overcompensation by the perpetrator can be a true signal of benevolence towards the other party and thus be seen as a sincere “going the extra mile,” but those situations are fairly rare, says Professor De Cremer.

David De Cremer

Professor David De Cremer

The researchers focused on the interaction between two strangers because they were most interested in tensions between economic and psychological motives in how people compensate people they have harmed; with strangers there is no past pattern of interaction that could influence trust and cooperation in the future. Participants in the study were undergraduate students at Ghent University in Belgium, from different majors.

The study’s authors are Tessa Haesevoets, Alain Van Hiel and Chris Reinders Folmer of Ghent University’s Department of Developmental, Personality and Social Psychology, and Professor De Cremer.

The authors are now preparing a follow-up study to their overcompensation research that looks at actions taken by banks aiming to rebuild trust following the financial crisis, including public relations measures, and whether these can backfire in the same way as financial overcompensations do.