Research: Cutting executive pay can lower worker productivity

New research from the University of Melbourne and University of Auckland shows cutting executive pay can lower the motivation and productivity of lower-paid workers and have detrimental effects on an organisation.

The researchers looked at a unique situation in China where the government legislated for executives at State Owned Enterprises (SOEs) to receive salaries closer to the pay of other workers.

The change came into effect in 2015 so researchers were able to look at the three years before and after the change to analyse its effects. They did the same analysis for non-SOEs in China where the legislation was not applied. Overall, they analysed over 12,700 company-year observations.

Productivity was measured before and after the change by finding an average employee’s contribution to sales revenue and overall input-output efficiency.

The researchers found a significant drop in productivity from lower-paid workers after the changes came into effect.

“Our research shows reducing executive pay may be fairer and in theory should placate workers, but it can actually lead to workers losing motivation which has negative consequences for a company,” said Associate Professor Qin.

Associate Professor Qin said the traditional cultural values of the workers being analysed were a major factor in the results.

“We found the lowering of productivity was partly because reducing the pay of someone in authority challenged the traditional, and often masculine, hierarchies and competitions played out in many communities in China,” said Associate Professor Qin.

“When implementing policies that lower pay disparity, governments and organisations need to take cultural values into account,” he said.

While the study primarily focuses on China, the researchers believe further explorations are needed to look at pay disparities and cultural influences on economic performance in Australia.

The findings were made by Associate Professor Bo Qin and Associate Professor Flora Kuang from the University of Melbourne, and Dr Xing Yang from the University of Auckland.

See the full research results in Science Direct.