In the retail industry, theft by employees costs businesses roughly $15.1 billion in 2011, according to estimates from the University of Florida and the National Retail Federation. For the millions of small companies with receipts under $1 million, the loss of product — part of what’s known technically as “retail shrinkage” — can threaten a firm’s very survival. Some estimates have suggested that many as one-third of business failures can be traced to workplace theft.

With so much at stake, how do owners protect their companies? One proposal is to pay employees more. After all, while the current economic downturn has been hard on companies, times have been even tougher for low-skilled workers: The minimum wage is now lower in real terms than it was in 1968 and income inequality has widened, even as the cost of housing and other living expenses continues to rise. Proponents of paying higher wages say that it would not only attract more-honest employees, but also reduce incentives to steal and increase goodwill toward employers.

Exploring this hypothesis, professors Clara Xiaoling Chen of the University of Illinois and Tatiana Sandino of Harvard Business School consider the relationship between wages and theft in their 2012 study, “Can Wages Buy Honesty? The Relationship Between Relative Wages and Employee Theft,” published in the Journal of Accounting Research. After collecting data from more than 251 convenience stores and 31 chains, they found that higher wages do exert a positive influence on employee honesty. While prior research has focused more on the impact of pay cuts (and found that when salaries were cut by 15%, theft increased), this is the first study to consider the effect of sustained wages on employee honesty.

The study’s findings include:

• Using one mid-sized convenience store chain as an example, the researchers found that increasing salaries by $1 an hour would cost a total of $16,285 annually. At the same time, the rise would prevent $6,362 in employee theft per year — 39% of the cost of the wage increase. While the savings don’t entirely cover the cost, an “employer may find it economically beneficial to raise employee wages if other benefits from wage increases (e.g., reduced employee turnover, greater effort) translate into at least 61% of the cost.”
• The research “suggests that the benefits from increasing employee pay are likely to be greater if firms use multiple employees per shift to staff their stores because higher wages also induce more ethical norms among the coworkers.”
• Employees are less likely to steal in the presence of co-workers when cash is involved, but the presence of co-workers has less of a deterrent effect on inventory theft. The authors posit that employees consider cash theft a more serious crime than inventory shrinkage and — in line with other studies — people tend to behave less honestly when the medium is something other than money.
• In areas of higher property crime, employee theft is typically less of a problem.

The authors state that they would expect similar results for retailers such as restaurants, department stores and drug stores. While higher wages won’t completely protect businesses against theft, the study’s findings may help managers make more informed decisions about pay rates. Because the anti-theft benefits of higher wages will not pay for themselves, the researchers suggest further research into other methods of reducing theft, such as tying employee bonuses to the levels of inventory shrinkage or cash shortages.

Tags: crime, ethics