DP17010 A Pay Change and Its Long-term Consequences
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.