Do Pay Cuts Reduce Employee Performance

Monday, May 24, 2010

I recently reviewed an article published by WorldatWork titled, ”Do Pay Cuts Reduce Employee Performance? Evidence from Airline Pilots and Police Officers”. In the article, the author, Frank Giancola, reviewed the affects of economic recession on the stability of wages, the impact of wage reductions on performance, and the relevant theories associated with “wage rigidity”. To determine if wage reductions had an impact upon the performance of airline pilots, the author reviewed one study (1) of airline on-time arrival and departure times. The study reported to have found a minor decline in on-time arrival and departure times when the cutbacks were announced, thereafter, arrival and departure times returned to normal. A second study (2) reviewed by the author involved police officers and the outcomes of final-offer arbitration processes used to settle wage and other labor disputes. As might be expected, when police officers prevailed in a dispute, performance did not decline; however, the opposite was true when the employer prevailed.

Intuitively, the casual observer might conclude any significant reduction in wages would always lead to a reduction in performance and an increase in performance related behaviors, such as absenteeism. How could it not? While we all want to believe, the only reason for any employee to report to work is purely economics and self-severing, many employees do have needs beyond those of basic physiological and safety. Consider that as employees we spend upwards of one third of our lives in some sort of work environment interacting with numerous other individuals, e.g., co-workers, vendors, service personnel, customers. Like our families, religious, educational, and fraternal institutions, the work environment is a social organization in and of itself.

The bonds developed with co-workers can be every bit as strong as those formed with our immediate family members. Since we often spend more time with co-workers than we do with our spouses and children, we often know as much about the co-worker’s life, as we know about that of our own family. Co-workers form an extended support network, which delivers many of the needs not otherwise met in our family lives and even supplements others. During times of stress, our co-workers provide support, which may not available from other relationships and may even outlast marriages. Even when the employment relationship is broken, the co-worker bond is frequently and sufficiently strong enough to last for years or decades into the future.

Thus, far beyond meeting the basic needs of the employee, the work environment provides for satisfaction of many of the higher-level requirements of the individual that can often be found only in the work situation. In fact, one aspect of the concept of employee total rewards forms the basis for affiliation between the employee and the employer, co-worker community. We see the impact of affiliation every day in the form of religious and social organizations, and regrettable, even street gangs. So, sometimes, it is not just about the economy.

1. Lee, D. and N.G. Rupp. 2007. “Retracting a Gift: How Does Employee Effort Respond to Wage Reductions.” Journal of Labor Economics. October: 725-761.

2. Mas, A. 2006. “Pay, Reference Points, and Police Performance.” Quarterly Journal of Economics. August: 783-821.