Accounting for High Job Performance

Empirical Data to Drive Compensation Design

By Mina Pizzini

Do a goodjob and you might earn a raise. But what about the reverse - if you start at an above-market wage, will you per­form better? Enough to show a return on investment for your business?
Efficiency wage theory contends that above-market wages will lead to higher performance, either by attracting more skilled workers and/or by inducing workers to put forth greater effort. The theory proposes that firms should increase wages above the market wage until the benefits of the higher wage (as measured by improvements in firm prof­its) equal the costs of the wage premium.
Although the efficiency wage theory is compelling, it is difficult to test the theory in practice because researchers cannot easily establish whether higher wages are the cause, or the consequence, of higher profits. It is also difficult to find a large number of workers who are paid different amounts to perform the same job. Dr. Mina Pizzini, associate professor of accounting, and her colleagues were able to overcome these obstacles with a data set of 450 geographically-dispersed hotels owned by one national chain.
The hotel managers in the study were paid a standard salary and housed in a rent-free apartment on hotel property; therefore, compensation was the sum of salary and the rental value of the apart­ment. The wide range of geographical differences in rental housing costs gave rise to significant variation in compen­sation for hotel managers performing the same job. For example, compensa­tion for the hotel manager in Monterey, California, was 40 percent above that of the hotel manager in Waco, Texas, even after controlling for regional differences in wage rates.
Pizzini and her fellow researchers found that higher wages were significantly associated with higher revenues, profits and customer satisfaction. More importantly, the incremental profits associated with higher wages justified their cost. Finally they identified which settings would benefit most from offering wage premiums. The results show that wage premiums produced the greater benefit with hotels facing greater competition and those that were more difficult for chain management to monitor.