Forthcoming
Article
Management Science

Employee Responses to Compensation Changes: Evidence from a Sales Firm

By: Jason Sandvik, Richard Saouma, Nathan Seegert and Christopher Stanton

Format:Print

Abstract

Using data from an inbound sales call center, we study employee responses to compensation changes that ultimately reduced take-home pay by 7% for the average affected worker. These changes caused a significant increase in the turnover rate of the firm's most productive employees, but the response was relatively muted for less productive workers. We quantify the cost of losing highly productive employees and find that their relatively high sensitivity to changes in compensation limits managerial flexibility to adjust incentives. For the workers who remained at the firm, the compensation changes had minimal effects on performance. Our results speak to the possible sources of compensation rigidity and the difficulty managers face when setting compensation.