Study: Higher wages linked to reduced shrink

According to the preliminary results of the National Retail Security Survey released earlier this summer, retailers lost more than $34 billion to theft in 2011. Theft by employees constituted the majority of those losses, accounting for nearly 44 percent or more than $15 billon.

While many believe the solution to reducing employee thefts is through the implementation of the latest and greatest security technologies, a new study suggests that the solution to the problem could be much simpler – just pay the employees more.

The study, "Can Wages Buy Honesty? The Relationship between Relative Wages and Employee Theft," looked at cash shortage and inventory shrinkage in relation to wages paid using datasets from the convenience store industry and found that not only do higher wages lead to a reduction in shrink, but they also promote social norms that discourage employees from stealing.

Though this study only looked at convenient stores, Clara Xiaoling Chen, an assistant professor of accountancy at the University of Illinois at Urbana-Champaign, who co-authored the study with Tatiana Sandino of the University of Southern California, said that the results would be applicable to most retail environments.

"In our study we show that, for example, if you pay (employees) one more dollar for their hourly wage, you can recover about 40 percent of that one dollar from theft prevention," Chen explained. "And if you take into account other benefits, it’s probably going to be greater than the one dollar cost. For example, at a larger retailer, maybe the percentage of pay premium that can be recovered from theft prevention may be higher or lower and they just have to estimate the other benefits from a higher wage and see whether the benefits outweigh the costs."

Among the benefits that Chen and Sandino didn’t take into account included increased productivity, as well as lower turnover and training costs that result from higher wages.  "If you paid them higher wages, they would probably make a greater effort to sell a product and they’re less likely to quit, they’re less likely to go to another store and that will reduce the training costs and hiring costs for example," she said.

Chen said that one of the most surprising findings from the study was the fact that property crime rates where stores were located had virtually no impact on cash shortage or inventory shrink. And while having multiple employees work the same shift did help reduce cash shortage at the stores examined in the study, it had the opposite impact when it came to inventory shrinkage.

"We normally think that if there are multiple employees in a store at the same time, they should monitor each other and it should lead to less dysfunctional behavior, but we found the opposite for employee shrinkage," Chen said. "Our conjecture is that for cash theft, there is a clear norm that stealing cash is wrong so there is stronger social sanction against cash theft. So when there are multiple employees in the same shift, it is less likely for one of them to steal cash from the register.  There’s less sanction against inventory shrinkage. The morale matters a lot, so if you gave them higher wages and they feel grateful and they feel content, they’re more likely to monitor each other. But if you gave them a lower wage, they feel resentful and they then collude to steal beer, food or some smaller item from the employer."

Security cameras may also not be of much help in curbing employee theft, according to Chen. "Surveillance cameras do not help because employees that are experienced, they can circumvent, they know where to steal so that it will not be caught by the cameras," she added  

The main takeaway from the study, according to Chen, is that retailers should look at boosting their loss prevention efforts through wages and other forms of employee recognition.

"Because it’s so hard to catch employee theft, our results suggest that it’s probably more effective to induce gratitude from the employees and make sure they’re happy and have greater morale because they will feel greater guilt about stealing from their employer," she said. 

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