COMMUNICATING PAY CUTS IN CANTERWOOD

Professor Gina Gallant was thrilled. She had just finished a phone conversation with Kent Auburn, CEO of Aerospace Inc., a manufacturing firm headquartered in Canterwood, Washington (near Seattle). Auburn had told Professor Gallant that he would give her the opportunity to conduct a field experiment to test aspects of organizational justice/fairness theory in exchange for helping the company with communicating a pay cut. Such opportunities were rare, and as a new researcher on workplace justice, Gallant could not help but be excited about this opportunity. Soon, however, Gallant’s excitement turned to tension. She now had to develop a design for a field experiment (or quasi-experiment) that satisfied both her high academic standards and the company’s objectives. Employee Theft Employee theft is considered a serious problem among HR managers. While it is difficult to establish exact figures for employee theft (for example, in stores, it is not easy to distinguish between shrinkage due to employee theft versus customer shoplifting), losses attributed to employee theft have been estimated at $40 billion per year in the U.S.,1 though other estimates range from $6 billion to $200 billion annually.2 The results of a 1997 study suggest that about 50% of all employees engage in some form of employee theft.3 Aerospace Inc. Aerospace Inc. produces small mechanical parts mostly for the automotive and aerospace industries. The company has three manufacturing plants in the Northwestern United States, which are highly similar in terms of organizational features (size, physical layout, organizational design, operations) and employee profiles (gender, age, level of education, tenure with the company), but operate independently of each other. Each plant employs about the same number of people (i.e., 64, 53, and 66, respectively), most of whom are hourly-wage semiskilled and unskilled production workers. The remaining employees are low-level managers and hourlywage clerical workers. For instance, in one plant, among the 64 employees, 47 are production workers, five are managers, and 12 are clerical workers. Equity Theory and Organizational Justice Theory The basic idea of equity theory is simple. The assumption is that people consistently judge whether the outcomes that they receive are fair in relation to their inputs. Organizational scholars have built on equity theory to develop organizational justice/fairness theory. According to this theory, organizational justice has three main components; namely, distributive justice, procedural justice, and interactional justice. 1 Camera & Schneider, 1994; Lipman & MacGraw, 1988 2 Green, 1997; Jones, Ash, & Soto, 1990; Miner & Capps, 1996; Murphy, 1993 3 Wimbush & Dalton, 1997 Bus 2880 (Fall 2017) – Case Competition Professor Gallant Professor Gallant has recently started a program of research in the area of organizational justice theory. On the basis of this theory, she knows that the detrimental effects of a pay cut are not only a function of the size of the pay cut (i.e., the actual outcome), but also of the process through which the pay cut is implemented. For example, decision outcomes and procedures are better accepted when a) people are assured that higher authorities are sensitive to their viewpoints, b) the decision is made without bias, c) the decision is applied consistently, d) the decision is carefully justified on the basis of adequate information, e) the decision makers communicate their ideas honestly, and f) persons influenced by the decision are treated in a courteous and civil manner.4 In other words, if employees feel that they have been treated fairly, they will not react as negatively to a pay cut (e.g., exhibit less counterproductive behaviour). The Situation Aerospace Inc. has lost two large manufacturing contracts that affect two of the three plants. Auburn was now forced to reduce the payroll. He considered two options for the two affected manufacturing plants; namely, a layoff of employees or a pay cut of 15%. Auburn decided that he would not lay off employees, because he wanted to implement a solution that would have the least devastating effects on the employees. He felt that if he laid off some employees, it would profoundly affect them and their families. This meant that he had to cut employee pay. He feared the employees would perceive the pay cuts as extremely unfair and might “get back” at the company by, among other things, stealing inventory such as tools and supplies. He also fears they could withdraw their efforts in other ways that could hurt the company and its culture of helping one another. In his two-decades as a manager and senior executive, this is the first time that he has faced a situation where he has to reduce employees’ pay. He’s not sure how to go about it, but he expects that employees will not be happy. He has decided to seek advice from Professor Gallant with regard to executing the pay cuts and assessing their impact in several key areas, including employee theft. The accounting department, which is located at the company headquarters, has kept records for computing plant-level “shrinkage” (i.e., the percentage of inventory unaccounted for by known waste, sales, use in the conduct of business, or normal depreciation). In other words, shrinkage was viewed as an indicator of employee theft. The Task Professor Gallant knew that she had a unique opportunity. She could not afford to mess up. She also knew that she wanted to demonstrate, in a field setting, that adequate explanations of a bad outcome (e.g., a pay cut) indeed ameliorated negative reactions to it. Furthermore, she had to consider the concerns of Aerospace Inc. and its employees. Finally, as a scientist (and with an eye on producing a top-level research paper), she had to make sure that she could draw defensible causal inferences, which was typically a challenge in field experiments. With these thoughts in mind, Gallant sat down and started thinking about the design of the experiment.