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(originally published by Booz & Company)


Paying for Employee Honesty

“If the other benefits from wage increases translate into at least 61% of the cost of the wage increase, an employer may find it economically beneficial to raise employee wages,” the authors write. This is a realistic threshold for many of the chains in the study, the authors note. Because their analysis deliberately focused only on hourly wages, it probably underestimated the overall benefits from paying increased compensation. For example, companies might be able to exert more influence over their employees’ honesty by linking bonuses to how little stock or cash disappears on their shifts.

Relatively higher wages also promote ethical responsibility, the authors say. Their analysis found that the presence of co-workers was more likely to lead to theft, especially of inventory. But this effect was significantly reduced among higher-paid workers, suggesting that wage levels influence the behavior of co-workers. “In industries or businesses that use multiple workers to staff a store or a retail outlet, it’s even more beneficial to pay a wage premium,” the authors note in a press release.

The study’s takeaways can be applied to a wide range of everyday service and retail businesses, such as restaurants and department stores, the authors write. In these settings, where there are large variations in the way employees are monitored, the payoffs from stealing are not high enough to offset a higher wage. (However, this is not the case for employees working in venues like casinos and jewelry stores, where a one-time theft could be a literal jackpot.)

This study aligns with some other research that has found paying more to higher-ranking executives cuts down on fraud, while underlining the need for managers to create an optimal pay structure. Managers should bear in mind, the authors write in citing the conclusion of an earlier researcher, that “paying higher-than-market wages helps companies effectively manage their employees as a way to produce sustainable competitive advantage.”

Bottom Line:
Retail employees who earn a higher wage than their peers are less likely to steal money or inventory. For the companies in this study, savings on pilfered cash and goods paid for almost 40 percent of the wage increase, and the rest of the wage costs were potentially covered by reduced employee turnover and other positive side effects.

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