Higher retail wages correlate with lower levels of employee theft

A study co-written by a University of Illinois business professor shows that higher wages are associated with lower levels of employee theft, shedding light on the impact that compensation practices have on shaping employee honesty and ethical norms in organizations.

Using data sets from the convenience-store industry, Clara Xiaoling Chen, a professor of accountancy, and co-author Tatiana Sandino, University of Southern California, found that after controlling for each store's employee characteristics, monitoring environment and socio-economic environment, relative wages – that is, wages relative to those received by other employees performing similar jobs in the same sector and region – were negatively associated with employee theft.

While previous studies have focused on the effect of higher wages on employee effort or turnover, Chen and Sandino document the effect of higher wages on employee theft as measured by cash shortage and inventory shrinkage.

''There's actually very little research on the effect of wages on employee theft,'' Chen said. ''A seminal study conducted in the field has examined what happens after a firm cuts workers' pay. What's different in our paper is that there's no such shock as a pay cut, whose effect is typically short-lived and does not persist. The fact that we can document the relation in our study using cross-sectional data suggests that the effect of wages on employee theft can persist over time.''

The researchers argue that paying relatively higher wages discourages employee theft for two reasons. First, employees receiving higher wages are less inclined to commit theft because they wish to retain their higher-paying job or as a gesture of positive reciprocity. Second, firms that offer relatively higher wages may attract a higher proportion of honest workers.

There is also a ''wage tipping point'' for employers to consider, when the cost of paying more toward employee wages is greater than the cost of employee theft.