Pay Workers More So They Steal Less

New research by professor Tatiana Sandino confirms what many top companies have long believed: Good wages and benefits are linked to a company's low turnover and to happier, more honest workers.
by Kim Girard

Bigger paychecks for retail employees could generate significant payoffs for employers by reducing worker theft and raising the level of moral behavior in the workforce, a new study shows.

Tatiana Sandino, an associate professor in accounting and management at Harvard Business School, writes about the subject in a new paper: Can Wages Buy Honesty? The Relationship between Relative Wages and Employee Theft. She cowrote the study, published in the September issue of the Journal of Accounting Research, with Clara Xiaoling Chen, an assistant professor of accountancy at the University of Illinois at Urbana-Champaign.

“Our study suggests that an increase in wages will decrease theft, but won't fully pay off”

With this research, Sandino and Chen contribute to a growing body of knowledge about how wages affect employee behavior and social norms in the workplace. Previous research found firms offering wages higher than the local competition experienced both increased productivity and lower turnover, but did not address the issue of employee theft.

Employee theft comes with a huge price tag for US businesses, accounting for up to $200 billion in annual losses, according to one estimate cited in the paper. The problem is particularly severe in retail chains: According to the 2008 National Retail Security Survey, inventory-related employee theft contributed to a loss of $15.9 billion.

Intrigued by the size and scale of the loss, the researchers set out to find whether higher wages, relative to the differing pay scales in local markets, could help keep workers in check.

Can Pay Cut Crime?

One of the few empirical research studies on the subject, published in 1990, found that when groups of employees received a 15 percent pay cut, theft increased. But what if employees were paid more than workers in competing organizations? Would theft decrease? Before doing her research, Sandino hypothesized that higher compensation would discourage stealing for several reasons.

  • First, employees receiving higher pay would feel more warmly toward their employers and would rather reciprocate than retaliate.
  • Next, since higher-paid workers want to hold on to their jobs, they would not be as likely to steal as lower-wage workers might. In this case, not stealing is "not a matter of being loyal to your employer," Sandino says. "You are protecting a job that gives you better pay."
  • And third, firms offering relatively higher wages could attract more honest workers to start with.

These arguments suggest that higher wages could produce or attract up-and-up employees who "will steal less and make sure that other employees are not stealing," Sandino theorized. However, higher wages could also be unrelated to theft if honesty only depended on the workers' moral values, if workers were unaware of wages paid by the competition, or if they overlooked wage deviations by reassessing the value of their own inputs.

For the study, the researchers used two data sets from chain stores and interviewed managers of nine convenience store chains. The first data set, for the year 1999, came from 76 stores in a midsize retail chain and was used to weigh cash shortage and inventory shrinkage, the two most important sources of financial loss in retail, as a percentage of overall sales. Another subsample of data from 251 stores within 31 retail chains provided information about the ratio of cash shortage to store sales. That data came from a survey conducted by the National Association of Convenience Stores in 2003 and 2004.

The study took into account the workers' different socioeconomic environments, the amount of monitoring that managers performed, and employee characteristics such as how many people typically worked in the stores.

Is There A Payoff?

As expected, Sandino and Chen confirmed that overpaying workers relative to market wages caused a drop in employee theft. A cost-benefit analysis proved that what companies saved in cash and inventory loss covered about 39 percent of the costs associated with wage increases. (So if a company increases wages by $1, it can expect to lose almost 40¢ less in cash and inventory.)

"Our study suggests that an increase in wages will decrease theft, but won't fully pay off," Sandino says. Therefore, an employer may find that it makes sense to raise employee wages if other benefits from wage increases—such as reduced employee turnover or higher employee productivity—translate into at least 61 percent of the cost of the wage increase.

The analyses also suggest that benefits are likely to be higher in situations where employees share a shift. Inventory losses are higher in stores where employees work together, either because it is more difficult to identify the person responsible for stealing or because coworkers create an atmosphere that encourages theft. Nevertheless, the incremental losses observed when employees work in groups are absent in firms that pay higher wages.

And what about the previous study that showed employee pilfering rose as wages decreased? Not supported in this research. Sandino admits that the sample in their study may not have been large enough to capture the effects of underpayment. Nevertheless, she explains: "Our findings are contrary to an argument in prior literature suggesting the effects of wages on employee behavior are a consequence of underpayment, where underpaid workers retaliate against their employers in proportion to their underpayment, but overpaid workers rationalize the overpayment away."

The research results dovetails with what CEOs of some big retail companies like Costco and the Container Store argue publicly: that good wages and benefits are linked to a company's low turnover and to happier, more honest workers.

What Businesses Can Learn

The study has important practical implications for business. For example, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework, used by the majority of CFOs for internal corporate control, emphasizes that adequate human resource practices such as "competitive compensation programs" play an important role in preventing fraud.

According to Sandino and Chen, takeaways from the study are likely to apply to other types of retailers, including restaurants, department stores, and drugstores, as well as to other service or consumer product firms, where the payoffs from stealing are not disproportionately high relative to potential wage premiums, such as in casinos.

Ultimately, a company must decide whether raising wages makes fiscal sense.

"You can't just assume that our study shows that you should increase wages," Sandino concludes. But a company struggling to keep minimum-wage employees honest would be wise to consider it.

About the Author

Kim Girard is a writer based in Brookline, Massachusetts.
    • Anonymous
    Or, as we used to say long ago, "If you don't pay the cook, he'll pay himself."
    • Anonymous
    How far up the organizational hierarchy does this apply? Does it reach the top 1%?
    • Mark Nesbitt
    • President, Vertex Consultants
    The research analysis is interesting, and quantifies another plank in retail people-management strategies.

    But I would flag that while the correlation is observed, the causation linkage may in fact be driven by other forces. We have done extensive analysis of people-management and performance strategies at retail, including in-depth analyses of highly comparable operations with different HR strategies, in a national franchised hard-goods retailer. All retailers are looking to manage their wage percentage (wages relative to sales), but it's easy to observe two competing strategies: "economy" (focus on tight control of wage rates) and "efficiency" (focus on productivity management, sales per employee hour). You can find low wage percentages in both camps, but sales growth and employee satisfaction are higher in the second.

    Importantly, while average wage rates are higher in the second group, the major driver of better results is not the wage rate but the people management strategies. Achieving higher productivity requires less turnover, stronger employees, more alignment to strategy, etc. The wage rates are a part of the solution, but they don't drive employee behavior much. It's easy to find "country club" stores with high wage rates and weak performance management . . . that's no recipe for business success.

    So I would suggest from experience that raising wage rates by itself will not yield the observed average improvement in shrinkage. Changes in wage rates need to be coupled with changes in people management, for the pay-off to be achieved.
    • Sherpa
    A thief should never be rewarded, in any way. They should be terminated. A good loss prevention system can make this happen.
    • Anonymous
    No theory pay off until the employer is willing to apply spiritual teaching and spiritual well-being into business. When an employer practice spiritual well-being, employee will receive compassion, loving kindness, well-being and peace in the organization. Spiritual well-being is the only focus that should be studied and yet ignored. This explains why no amount of money offered would get sustaining result when spiritual well-being is missing.
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited
    Each employee needs to be paid adequately at the very start of his/her career and given appropriate raises periodically to take care of inflation and other factors. Once this is ensured, the premise that stealing would be directly proportional to what they get becomes a fallacy.
    Let's introspect why people steal. It's not for improving their basic needs which are met by what they rightly earn. Desire for more and greed are the two important causes limit of which cannot be determined.
    Unethical uncontrolled practices have to be checked and exemplary actions taken to circulate a message across the organisation that all culprits (stealers) will be dealt with mercilessly.
    There is no panacea except true discipline.
    Alot of traditional one man companies, deliberately pay less wages but open stealing oppotunities to secure workers allegiance. Most of these companies easily fold up under normal organisational accountability
    • Tendai
    Quite an interesting analysis. I think higher wages need to be supplemented by a strong business culture which incorporates effective loss control and people management skills in order to guarantee expected outcome
    • Taat Subekti
    • Chairman, Dharma Shanti Foundation
    I believe that there is little correlation between small wages and intention to steal. In Indonesia, eventhough the employee get raised in their payment, but stealing (corruption especially) is still flourishing. The most important in building employee loyalty is not only through high-payment, but it is more importantly to establish an accepted vision that must be hold strongly together and high moral and professional standards, among the people (including the management) who involved in the organization.
    • Chrizantos Angono
    • Head of Logistics Unit, NFC BANK Cameroon
    Wage should be tie with performance and results not effort. Non performing employees should be terminated and the others should be performing who should have wage rises (or bonuses) periodically eg annually. whenthe employer allows non performing employees in the organisation they request for pay rises of which the are not due and distract /demotivate the performing employees
    • Dr.K.Prabahkar
    • Professor, SRM University
    An analysis of income of employees shows a tendency towards time glass shaped form with highest salaries going to higher management ( disproportionate to their contribution) and salaries of workers showing a downward trend. We have a small percentage of extremely high paid and large numbers of low paid jobs. If the employees feel that feel that the organization is not ethical or prone to mess with the accounts and pay no taxes, then there is every chance for employees to steal, even if they are higher paid than market rates. I have done research on some of the organizations in India ,who paid less and if the organization takes care of medical emergencies, other social obligations employees and ethical are least prone to employee dishonesty. I strongly believe that this situation of dishonesty is brought about by overemphasis on outsourcing, cost cutting, creative accounting and above all CEO pay packets disregarding the social
    environment of employees.
    • ali raza
    • Student Affairs, IB&M UET Lahore Pakistan
    Totally agree with the criteria that a worker should be paid sufficient wages to meet his/her expanses without any hassal and to avoid theft. On the other side a worker should be awarded and highly praised if he/she helps and cooperates with the management to point out the loop holes at the working premises. This will definetly reduce theft and discourage workers to think negative and the workers involved in such activities should never be spared to set examples for others.
    • C R Shetye
    • Partner, Tech Power
    If all the retailers accepted these findings and increased the pay, then none of the advantages stated would work and then what? Increase the salaries further, till what level? According to me the answer is the way you treat them! Once they are sure of fair treatment and above all respect the behaviour changes significantly. Consider children, when they are treated as grownups, with their own rights and duties, the behaviour is significantly better.
    For the thefts, has anybody tried weighing the person in & out? It will definitely show up. You can do it covertly if you feel that the idea will not go down with the staff.
    • kent norton
    • court mediator-mgt consultant, harvard.dispute
    people steal and destroy what they have no part of; what they build and feel that it is taken from them. employers should help employees feel part of an organization. if CEO"s would work a day on an average job they would see from the bottom up how a company was operated and have more compassion for the lower level position. American jobs used to be built on respect and job satisfaction. the Hawthorne Study that Harvard did in the 20's showed that lighting had no effect on employee performance; paying attention to people and getting their input pushed performance beyond limits. why not truy that
    • John
    • Restauranteur
    You're kidding me, right? Your thesis is that higher wages leads to lower theft? Totally groundbreaking! I never would have expected those results. You are a genius.

    But sarcasm aside, this wouldn't work, especially not for small businesses that rely on unskilled minimum wage employees. Unless they're given a pay raise of over 100%, which would put their salary on par with entry level white collar jobs, those who steal will keep on stealing. Number 1, no one, especially not the young people I hire, wants to stay a waiter/waitress forever. They view the opportunity I give them as merely a stepping stone while they finish their studies or whatever. Number 2, people these days are increasingly spoiled and lazy. Their sense of entitlement, even for doing something as simple as standing behind a register, simply amazes me at times. This leads some employees to believe that they not only deserve more money than they're currently paid, but that they deserve as much money as me, the boss, because "well, what, you think you're better than me??".

    Personally, I feel that a much more effective way of preventing employee theft is simply vigilance. Keep your books organized, invite independent auditors over often, place cameras covering your entire establishment, and check your books and inventory everyday. Also, it is important to write up a bulletproof contract, even if it is only with minimum wage employees. Make sure that employees are aware that stealing will not only lead to termination, but also to legal action.