A Pay Change and Its Long-term Consequences

Miriam Krueger and Guido Friebel

No 17010, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In a professional services firm, top management unexpectedly adjusted the pay of consultants in some divisions to the pay in other divisions. In this quasi-experiment, fixed wages increased and bonuses decreased, reducing pay for the high and increasing it for the low performers. Individual outputs and efforts decreased by 30%, and attrition and absenteeism increased. The effects are driven by those who were rationally expecting to lose from the pay change. Observing a period of more than three years, we show long-term negative reciprocity of those affected, but no negative selection effects of new hires.

Date: 2022-02
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