The Impact of Raising Employee Pay on Manager-Employee Relationships


Many organizations introduce policies such as a pay raise to motivate employees. We experimentally investigate the effect of raising employee base pay on employee motivation to expend effort in a multi-period setting where managers can improve bonus pool allocation for employees by acquiring additional information. We predict and find that managers are less likely to acquire information and provide less accurate bonus allocations, and employees expend less effort in the presence of than in the absence of such a pay-raise intervention. Analyses show that the negative effect of pay-raise intervention on employee effort is driven by the reduced manager propensity to acquire information which affects the accuracy of bonus allocations. Our results provide important practical implications. Companies should be aware that management control interventions intended to motivate employees may backfire in contexts where relationship building between managers and employees is important.