Do Higher Wages Pay for Themselves: An Intra-Firm Test of the Effect of Wages on Employee Performance

Posted: 19 Aug 2014 Last revised: 3 Sep 2017

See all articles by James W. Hesford

James W. Hesford

Ecole hôtelière de Lausanne

Nicolas Mangin

University of Groningen

Mina Pizzini

Texas State University, San Marcos - College of Business Administration; Naval Postgraduate School

Date Written: December 28, 2014

Abstract

This study uses field data from 490 hotels in a single lodging chain to investigate three questions related to the efficiency-wage hypothesis. (1) Does paying workers higher relative wages ex ante result in better ex post actual performance, either by motivating workers to exert greater effort or by attracting higher quality workers? (2) Is the magnitude of the relation between performance and wages the same when workers are overpaid versus underpaid? (3) Do the overall benefits of paying higher wages outweigh the costs? The data enable us to perform powerful tests of wage-performance relations because exogenous factors that likely affect employee behavior are standardized across hotels. Our results suggest that actual performance (measured by customer satisfaction, revenues, and profit) is increasing in the relative wage, and that higher performance is the result, and not the cause, of higher wages. We find that the magnitude of the wage-performance relation is at least as large for workers who are overpaid compared to those who are underpaid. This result, which differs from the results of experimental studies, suggests that overpaid workers do not rationalize away wage premiums. Finally, our results indicate that increases in wages do, in fact, pay for themselves. A $1,000 increase in the general manager’s relative wage results in a $1,080 increase in profit for the mean hotel. This research contributes to a series of studies that investigates the extent to which wages influence performance (e.g. Levine 1992; Fehr and Falk 1999; Hannan, Kagal, and Moser 2002; Hannan 2005), and whether the marginal benefit of wage increases justifies their costs (Levin 1993).

Keywords: efficiency wages, implicit contracts, relative wages

JEL Classification: J31, J33

Suggested Citation

Hesford, James W. and Mangin, Nicolas and Pizzini, Mina, Do Higher Wages Pay for Themselves: An Intra-Firm Test of the Effect of Wages on Employee Performance (December 28, 2014). AAA 2015 Management Accounting Section (MAS) Meeting, Available at SSRN: https://ssrn.com/abstract=2482829 or http://dx.doi.org/10.2139/ssrn.2482829

James W. Hesford

Ecole hôtelière de Lausanne ( email )

Route de Cojonnex 18
Lausanne, 1000
Switzerland

Nicolas Mangin

University of Groningen ( email )

P.O. Box 800
9700 AH Groningen, Groningen 9700 AV
Netherlands

Mina Pizzini (Contact Author)

Texas State University, San Marcos - College of Business Administration ( email )

San Marcos, TX 78666
United States

Naval Postgraduate School ( email )

555 Dyer Road
Monterey, CA 93943
United States

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