The effect of different approaches to administering a fixed wage raise on employee productivity

Abstract

Firms frequently implement pay increases as a critical part of the management control system. We investigate how controllable factors related to the timing of such increases affect employee productivity. In practice, significant variation exists between when firms (i) announce a pay increase, (ii) quantify it, and (iii) make it effective. These events can occur concurrently (i.e., in the same pay period) or sequentially at different points in time (i.e., spread across several pay periods). We posit that varying the temporal separation of these events can affect employees’ effort and pattern of productivity. Via an experiment, we find employees respond to concurrent pay increases by initially providing high levels of effort that nonetheless diminishes significantly over time. In contrast, we find that they respond to sequential pay increases with a smaller but more persistent increase in effort, leading to equivalent levels of total output at a lower total compensation cost. However, our study also documents that employees have less satisfaction with the timing of the raise for sequential compared to concurrent raises. Our study provides insights for theory and practice regarding the benefits and costs of concurrent versus sequential raises.