Wage Cuts Reduce Productivity, but Wage Increases Don’t Necessarily Increase It

In a tough market, what’s the best go-to strategy for controlling costs? Too often, the immediate answer is layoffs, especially in industries with very tight margins.

Few industries have tighter margins than retail. And unfortunately, layoffs are commonplace when revenues dip. In his always-excellent Chief Happiness Officer blog, Alexander Kjerulf shares the story of Danish electronics retailer Fona and its plans to force pay cuts or layoff staff. Alexander calls this a mistake for two reasons (quoting):

1. This is bound to make employees unhappy and frustrated leading to bad customer service and lower sales.
2. Those employees who can find a better job somewhere will do so. Fona will be left with only those who can’t get away.

Taking his argument a step further, Alexander shares research cited in The New Yorker showing:

“Every dollar in additional payroll led to somewhere between four and twenty-eight dollars in new sales. Stores that were understaffed to begin with benefitted more, stores that were close to fully staffed benefitted less, but, in all cases, spending more on workers led to higher sales.”

I would argue this is true in every industry. Understaffing leads to overstressed, dissatisfied and ultimately disengaged employees. Regardless of industry, every employee is engaged in generating revenue through their role in the company. The “customer” may vary, but the relationship between the attitude with which a service is rendered and the end result is directly proportional.

Are layoffs too extreme? Perhaps you’ve been pushed to freeze wages or make pay cuts during tough times. The research is even clearer on the effects of this approach. In another post, Alexander points to a Swiss study (done with employees, not students in a lab) that shows:

"Wage cuts had a detrimental and persistent impact on productivity, reducing average output by more than 20 percent. An equivalent wage increase, however, did not result in any productivity gains."

Additional findings in the survey showed not just a persistent reduction in productivity among those who received a wage reduction, but this was purely a reduction in quantity of work, but not quality. So people were not so upset by the wage cut that they sabotaged their work. They only chose to do less of it.

What’s the lesson in all of this? Work has value. That’s why we pay people to do it. But the value of work lies in more than just the end product delivered. If pay rises don’t work, what does increase productivity? If we want to get the most out of our employees, we must help them connect to that deeper value – to the meaningfulness of their work. Frequent, timely and specific recognition of their efforts communicated in such a way that individuals understand how their efforts contribute to a bigger picture of success – that’s meaningful work. That encourages employees to do what you need them to do more and more, and again and again.

In your career, did you have a forced pay cut? How did it affect your attitude towards your work? Have you seen similar trends?

As Globoforce’s Head of Strategic Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. His articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin and Boston. Follow Derek on Twitter at @DerekIrvine.

Comments

[John Bushfield]

While I have never personally experienced a pay cut, I've seen the impact upon those who have. Interestingly, temporary reductions in salary due to business conditions were fairly well received when the rationale for the action was clearly communicated and all employees, not just a segment, participated. Even more interesting, temporary pay cuts actually resulted in more focus and better alignment in the workforce, perhaps because they now had some real 'skin' in the game.