Analyzing the Aftermath of a Compensation Reduction

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.