Paying employees higher salaries cuts down on the likelihood of them stealing from the company, according to new research.
The study by researchers at the University of Illinois and University of Southern California examined data from the convenience-store industry and found that higher wages are associated with lower levels of employee theft.
The researchers argue that paying higher wages discourages employee theft for several reasons, including that those employees earning higher salaries are less inclined to commit theft because they wish to retain their well-paying job. In addition, firms that offer relatively higher wages may attract a higher proportion of honest workers.
The researchers also found that the effect of paying higher salaries on employee theft is more pronounced when there are multiple workers, because larger paychecks promote social norms in such a way that co-workers were less likely to conspire to steal inventory.
"Relative wages influence the type of norms that develop among the co-workers," said Clara Xiaoling Chen, a professor of accountancy at the University of Illinois. "So 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."
There does come a "wage tipping" point, according to the researchers, when the cost of paying more toward employee wages is greater than the cost of employee theft.
Even though this study only analyzed data from the from the convenience-store industry, Chen said the results have important practical implications for managers in all industries, as employee theft accounts for $200 billion in losses for U.S. businesses annually.
"Our research provides systematic empirical evidence that wage premiums do play a role in reducing employee theft and fostering more ethical norms within an organization," Chen said. "The takeaways from our study are likely to apply to other types of retailers, such as restaurants, department stores and drugstores, and to service or consumer products firms with similar monitoring environments, where the payoffs from stealing are not disproportionately high relative to potential wage premiums."
Since shelling out more money isn't an option for many cash-strapped businesses, Chen said there are other ways to induce positive reciprocity among employees.
"You can show that you care about the workers, and you can find other ways outside of compensation to recognize their efforts," she said. "Paying employees higher wages is not the only way to cultivate positive reciprocity, but it certainly is a good way to foster employee loyalty and honesty."
The study, which was co-authored by Tatiana Sandino, of the University of Southern California will be published in an upcoming issue of the Journal of Accounting Research.