Does worker pay affect performance?

BERKELEY
December 19, 2006 6:22am

In a study examining the relationship between pay raises, expectations, and performance, a professor at the University of California, Berkeley's Haas School of Business found that police performance declined sharply when officers lost in arbitration over their wages.

Assistant Professor Alexandre Mas says haggling over small amounts can lead to a drop in employee performance.

Mr. Mas studied 383 final offer arbitration cases involving compensation disputes between New Jersey police unions between 1978 and 1996. The cases provided a unique opportunity to test how expectations about pay and actual pay affect productivity. In final offer arbitration, the two sides submit offers to an arbitrator and the arbitrator is allowed to choose only one side's offer in a binding settlement, thus creating a wedge between the pay police received and the amount they demanded. Mr. Mas then matched the arbitration data to monthly measures of police performance by jurisdiction.

Mr. Mas found that per capita number of arrests were 12 percent higher in the months following arbitration when arbitrators ruled in favor of police officers compared with when they ruled against them.

“Losing arbitration affects productivity, even when the stakes are small," says Mr. Mas, a member of the Haas School's Economic Analysis and Policy Group. "For employers in any organization, the results imply that it's really important to manage worker expectations when considering wage policy."

Mr. Mas found that when arbitrators ruled in favor of the union, police forces on average made 5 more arrests per month per 100,000 capita after arbitration than before arbitration. But when unions lost in arbitration, he found police officers averaged 6.8 fewer arrests per month per 100,000 capita after arbitration compared with before arbitration.

Officers did not appear to alter enforcement in murder and rape cases, but did make fewer arrests for assault, robberies, and property crimes if they lost arbitration.

"How a pay raise impacts productivity is a function of the expectations that workers had about the pay raise," Mr. Mas says.

On the other hand, Mr. Mas found that while merely winning itself affected performance, a larger win didn't necessarily result in the officers exerting even more effort than a smaller win. He called this the "Vince Lombardi" effect, named after the football coach who said, "Winning isn't everything, it's the only thing."

"Winning itself seemed to matter," Mr. Mas says. "So it may be better for an employer to let workers win if a dispute is over a small amount because there could be a large emotional effect from even a small loss by workers," he advises.

Using the fact that arbitration losses also affected the crime rate, Mr. Mas calculated how much municipalities are willing to pay in order to reduce crime, and was surprised by the low number. He found that in a typical town in his sample, by not settling with the union, the city manager reveals that he or she is unwilling to pay more than $75,000 in order to prevent 154 crimes from occurring. That translates to $487 per crime.

"It may be that the willingness to pay to reduce crime is low because most of the excess crimes reported following arbitration losses are property crimes and may be relatively minor in nature," Mr. Mas writes. "It could also be that city managers failed to recognize the social costs associated with police arbitration losses."