How financial and social incentives affect worker
absenteeism; evidence from a regime shift within
a firm.
Karl Over Aarbu and Gaute Torsvik
October 26, 2012
Summary
A regime shift in sickness absence compensation
This paper examines a regime shift in the compensation of sickness absence. The
data is from the customer service centre of an insurance company. Agents work
in teams. In 2001 the firm added a team bonus, based mainly on team sales,
to the workers’ salaries. Since the bonus was intended to become a permanent
pay supplement, a union agreement obliged the firm to negotiate its design with
labour representatives. One of their requirements was that workers sickness
absence should be compensated: if a team member called in sick, the team
could assign the average team sales to the person being absent.
At the commence of 2004 the firm decided to terminate the negotiated bonus
scheme, but it did not relegate the performance bonus. Instead of a permanent
bonus plan the management introduced quarterly campaigns. It was mainly a
change in names. There was, however, one significant adjustment; with short
term campaigns the firm was no longer obliged to negotiate the outline of the
bonus with worker representatives. When the management unilaterally could
design the bonus scheme, they decided to abolish the compensation of worker
absence. Hence, in the first quarterly campaign introduced in April 2004 an
absent worker would get zero sales as long as he or she was not at work. The
overall magnitude of the bonus was kept at the same level as before, but it was
partly individualized. In the performance pay contract that the firm refused to
renew in 2004 the sales bonus agents received depended solely on team sales; if
the average sales in the team was above 102 % of the team‘s sales budget each
team-member would earn an additional 2000 NOK. After the reform 50% of the
1
sales bonus was based on individual sales.
To identify the causal impact of the regime shift we compare sickness absence
in the customer service unit before and after the reform with the development of
sickness absence in other divisions of the firm, not affected by the reform. This
gives us a clear cut experimental change in the financial and social incentives
associated sickness absence which can shed light on several research and policy
questions.
Of course, if sickness absence is solely determined by the health of the workers
the reform should not cause any change in sickness absence (unless of course
one asserts that the reform will influence the health of the workers, which is
unlikely). If, however, attendance involves an element of choice - if moral hazard
is an issue - we need to examine how the regime shift in dealing with sickness
absence changes the incentives for attending work. In the following section we
develop a simple conceptual framework capturing the main concerns governing
this choice.
Expectations
We argue that there two reasons for expecting sickness absence to decline after
the reform. One is the unpleasantness of letting the team down; not attending
work will now reduce the chances of reaching the team‘s sales target. The other
reason for expecting reduced absenteeism is standard economic incentives; after
the reform an agent will reduce his or her chances of attaining the bonus if
absent from work.
There is however also an argument that predicts an increase in worker absenteeism. Many lab experiments, often framed as a employer employee relationship, show that strong reciprocity is a forceful human motivation. Humans
with strong reciprocity motivation are willing to take actions that lower their
own income if it increases the income of someone who have behaved generous
and cooperative towards them, and, on the negative side, are willing to forgo
income in order to punish someone who have behaved in a negative, disrespectful, controlling way. A one sided abolishment of a generous, trusting, contract
that basically insured the workers against bonus losses due to absence, must be
characterized as a negative act. Workers may want to reciprocate this change
with being more absent from work, even if it means a personal income loss. We
believe our study is a nice test of the relevance of reciprocity outside the lab.
2
Results
The abolishment of sickness absence compensation lead to a strong drop in
absenteeism. For males we estimate (diff in diff) the drop to be as high as 34
%, while the drop for women was 16%. We consider placebo reforms in other
years, but cannot detect any significant drop in sickness absence. We conclude
that sickness absence are (were) troubled with strong moral hazard problems.
We also conclude that if strong reciprocity was a concern for these agents,
this motivation was totally swamped by the change in the other incentives for
attending work.
We struggle to find a clean test to separate the relative force of the two
proposed explanations; (i) attendance increased because workers do not want to
to let their team down (ii) attendance increased because workers do not want to
loose their bonus. One way to untangle this question is to examine if there is a
change in workers effort while they are at work (intensive margin). Using part
time workers, who are not eligible for a bonus as a control, we find some evidence
that the agents exposed to the bonus system work harder to sell insurance after
the reform. This observation lends credence to the personal income explanation;
agents attend work more often and work harder because they are motivated by
the individual sales bonus. But there is also indications that team pressure is
an important concern or motivation at this workplace.
3