Analyzing the Aftermath of a Compensation Reduction

by Jason Sandvik, Richard Saouma, Nathan Seegert, and Christopher Stanton

Overview — This study of the effects of compensation cuts in a large sales organization provides a unique lens for analyzing the link between compensation schemes, worker performance, and turnover.

Author Abstract

Wage rigidity creates real and financial frictions, though the real-world drivers of rigidities remain largely unstudied. We use staggered commission reductions at a sales firm to estimate effects on worker turnover and effort. In response to an 18 percent decline in commissions, we find turnover increases for the most productive workers. We detect limited effort responses and find no evidence of different effects based on workers’ expectations of fairness or future promotion. The findings suggest that adjustment constraints stem primarily from adverse selection concerns on the extensive (turnover) margin as opposed to asymmetric effort responses on the intensive margin.

Paper Information