Cut salaries or cut people?

By Rachel Layne via hbswk.hbs.edu  Article

“Companies looking to shed costs in an economic downturn rarely cut compensation—typically, they slash jobs instead. New research confirms the wisdom of that decision.

The study concludes that when a company cuts employee pay the best performers are the first to leave, often joining a competitor. That, in turn, drags down the firm’s revenue even faster.

In contrast, if a company decides to eliminate head count, the employer can control who leaves—presumably letting go less-productive workers. …

‘There’s this huge literature in economics on why firms tend not to cut people’s pay,’ says Stanton, an applied economist who is an assistant professor in the Entrepreneurial Management Unit at HBS. ‘We can actually measure the consequences.’ …

The researchers followed 2,033 sales agents at an inbound call center, working in six divisions selling different digital services, such as cable TV packages, cellular phone plans, and internet connectivity services. …

Once pay reductions were announced, ‘highly productive’ workers, or those who took in 20 to 25 percent more revenue per call than average, fled at a 28 percent higher rate than other sales agents. Their departure led to a drop in sales of about 6 percent over the next five months, Stanton says.

‘When the best people left, they were on average selling more. So if you replace the best person with an average salesperson you lose the difference between the best and the average [sales].’ …

“’If you’re a top performer, then you can vote with your feet ….”

 

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