Analyzing the Aftermath of a Compensation Reduction

60 Pages Posted: 8 Oct 2018 Last revised: 7 Mar 2021

See all articles by Jason Sandvik

Jason Sandvik

University of Utah

Richard E. Saouma

Eli Broad College of Business, Michigan State University

Nathan Seegert

University of Utah - Department of Finance

Christopher Stanton

Harvard University - Business School (HBS); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2018

Abstract

Firms rarely cut compensation, so little is known about the after-effects when compensation reductions do occur. We use commission reductions at a sales firm to estimate how work effort and turnover change. In response to an 18% decline in sales commissions, corresponding to a 7% decline in median take-home pay, we find turnover increases for the most productive workers. We detect limited effort responses. Turnover and effort responses do not differ based on workers' survey replies regarding expectations of firm fairness or future promotion. The findings indicate that adverse selection concerns on the extensive margin of retaining workers drive the empirical regularity that firms rarely reduce compensation.

Suggested Citation

Sandvik, Jason and Saouma, Richard E. and Seegert, Nathan and Stanton, Christopher, Analyzing the Aftermath of a Compensation Reduction (October 2018). NBER Working Paper No. w25135, Available at SSRN: https://ssrn.com/abstract=3262398

Jason Sandvik (Contact Author)

University of Utah ( email )

Richard E. Saouma

Eli Broad College of Business, Michigan State University ( email )

Agriculture Hall
East Lansing, MI 48824-1122
United States

Nathan Seegert

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

Christopher Stanton

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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