Monday, April 1, 2013

Does Negotiating Pay with Employees Lead to Higher Performance and Profits?

Employers seek to create higher levels of employee performance as well as high firm profits. Standard employment contracts with predefined pay may not be offering an appropriate level of motivation for employees. Research conducted by Kuang and Moser may provide insight into how such negotiable contracts would work in the marketplace.

Participative decision-making can improve firm performance in two ways (Zwick 2004) which includes information transference and employee involvement. In the first case, the transference of information creates a more efficient organization while employee involvement improves overall satisfaction with the organization. Both help tie the individual to the organizations success and mission. 

Employees need accurate information in order to make choices within the workplace. The information disseminates useful data to employees (Freeman & Lazear 1995) that encourages effective organizational operations. The more useful information employees have the more efficient their daily activities and choices become which in turn raises the potential profits of the firm. Waste can be seen as a byproduct of poor choices.

Such participative management also produces a psychological effect on employees that raises their satisfaction and morale (Covaleski et al. 2003). With participative management employees may feel as though they are part of the organization and will take greater care to ensure its success. Through such activities, employees change from being the actors to the authors of their employment status.

Wages are a central factor in gainful employment and often determine the nature of employee-employer relationships. Wage negotiation is part of the process of participative management (Locke & Schweiger, 1979). Employees who have a level of control over their wages are likely to work smarter and harder in order to raise their market value.

Research conducted by Kuang and Moser (2011) studied the psychological effect of a model that offers a contract, allows the employee to counteroffer and then provides a final offer the employee can either accept or reject. It is believed that such offers raise the employee’s aspiration levels which will encourage them to either put forth more effort or move to another organization. A total of 80 MBAs with approximately 4.5 years of full-time experience were included.


-There were differences in firm profit and employee effort.

-When there is participative management and adequate employee information there is a reciprocal between employee effort and firm profit.

-If the firm affords the ability for employees to negotiate and raise their aspiration levels without adequate increases in pay once that level has been achieved a negative performance result may occur.

-Employees prefer no negotiation if they do not feel the relationship with their employer is equitable.

-Potential negative effects of mismanaged negotiation processes are more damaging than the positive effects of a well managed negotiation processes.


Employees, like firms, seek to create higher levels of pay and resources. Negotiating with employees can raise their level of performance as they become attracted to and seek higher levels of needs attainment. However, a poorly designed approach to negotiating with employees can damage and limit future performance. Successful negotiation provides a truer economic relationship between employer and employee when compared to contracts with defined pay as seen in unionized environments. Yet the perceived equity of those contracts and improved performance by employees relies on trust, participatory management, and adequate information. Equitable relationships based on trust result when employees have an incentive to raise their market value and employers reward employees for their increased value. It is important to note that if the negotiation process is not seen as equitable employee prefer a defined contract without negotiation.

Covaleski, M. . Evans, J. Luft, J. and Shields, M. (2003). Budgeting research: Three
theoretical perspectives and criteria for selective integration. Journal of Management Accounting
Research 15 (1): 3–49.

Freeman, R. & Lazear, E. (1995). An economic analysis of works councils. In Work councils,
ed. J. Rogers and W. Streeck, 27–52. Chicago: The University of Chicago Press.

Kuang, X. & Moser, D. (2011). Wage negotiation, employee effort, and firm profit under output-based versus fixed-wage incentive contracts. Contemporary Accounting Research, 28 (2). 

Locke, E. and Schweiger, D. (1979) Participation in decision-making: One more look. In
Research in organizational behavior, vol. 1, ed. B. M. Staw, 265–339. Greenwich, CT: JAI Press.

Zwick, T. (2004). Employee participation and productivity. Labor Economics 11 (6): 715–40.

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