COVID-19 has shocked our economy out of its equilibrium. Many companies have a newly remote workforce that could potentially be less productive. Companies will emerge from this shock to our equilibrium in one of two post-COVID-19 steady states.
One steady state is where employees feel supported by the company, hence they work hard and are loyal, making the company more profitable. This gives the company the financial capacity to continue to support its workers, making this a self-reinforcing steady state. The other potential outcome is one where employees feel unsupported by the company. They will produce less and be less loyal, thus increasing turnover and making the company less profitable. This restricts the company’s capacity to support its workers, making this a potential steady state that self-perpetuates.
Efficiency Wage Theory
One way to avoid the less profitable equilibrium post-COVID-19 would be to increase compensation. At first glance it appears increasing wages would increase cost and lower profits. However, efficiency wage theory tells us that wage increases can actually induce higher productivity. This, in turn, leads to more efficiency and increases profits. When employees are paid more than the market-clearing rate, or the amount of money they would be paid at another job, they do not want to lose the job they have. This means they will shirk less and are less likely to quit, so the firm reaps more “efficiency units” per worker and has a higher retention rate. In addition, as more people will want to work for the company with higher wages, they will attract a more talented workforce. Some models even indicate that employees paid higher wages are happier and healthier. In essence, investing in your employees not only benefits them, but the investment has positive returns for the company.
In 1987 Jante Yellen and George Akerlof wrote about how efficiency wage models explain why there is involuntary unemployment in the long run. This is because employers prefer paying wages in excess of the market clearing wage. Economists have also found several examples of companies offering above market wages and reaping the benefits. The earliest example is when Henry Ford introduced the five-dollar day in 1914, almost doubling the pay of most of his workers. This increase in pay led to higher productivity and profits as well as queues for Ford’s jobs.
Employing efficiency wage theory to bolster a company’s post-COVID-19 resilience is simple: Give everyone a raise. Some companies, like Amazon, Target and Campbell’s Soup, have responded to the pandemic by increasing their hourly wages. However, while this may have a positive impact on motivation, research in the confluence of psychology and economics tells us it may not be enough in all labor markets.
Behavioral Economic Theory
Behavioral economic theory demonstrates several non-pecuniary ways companies can increase intrinsic motivation and organizational commitment among their employees, which could help avoid being deflected to a less profitable equilibrium. Behavioral economists have long noted that reciprocity — how we respond to the kindness of others — has a significant effect on behavior: Those who are shown kindness from their managers are more likely to reciprocate with higher productivity. Researchers have also found that mere attention motivates hard work. In a factory near Chicago in the 1920s, a series of social experiments changed the physical conditions of an electric company’s workspace and identified a phenomenon called the Hawthorne effect. The findings were that employees were motivated less by the actual changes in lighting or work hours but rather by the fact attention was being paid to them.
Over the past couple of years, pleasant and flexible workspaces have been the focus of many companies’ non-monetary compensation. This demonstrates the company cares about the health and wellbeing of their employees. Google, Dropbox, Salesforce and Facebook all have free food in their offices; Google, Facebook and Diageo have on-site fitness; Google lets employees bring their pets to work; and Airbnb and Salesforce offer free yoga classes.
These benefits are less relevant for our currently remote workforce, so it is important for companies to find other ways to motivate employees. Since the reciprocity and Hawthorne effects will no longer be created by a free pint of Ben & Jerry’s ice cream, companies will have to turn to their managers and leaders to create this motivation. Gallup tells us this can be successful as 70 percent of the variance in employee experience can be attributed to their manager. The interactions leaders create for their teams and the communication they have with each member is more important during this pandemic than it’s ever been before.
Practical Suggestions for Team Leaders
There are many options for employing what we know from behavioral economics to boost morale, productivity and profitability. Team leaders can leverage today’s technology to achieve results remotely. Here are some practical things leaders of remote teams can do to create highly motivated and effective teams:
- Prioritize regular check-ins so team members feel you are paying attention to them by setting regular calendar notifications and reaching out when prompted.
- Use more informal communications applications like Slack to strike up personal conversations (like those that would naturally happen when you are riding in the same elevator) to enhance psychological safety, one of the key drivers in engagement.
- Instead of the phone, use Zoom; opt to activate your camera during the call and encourage others to as well, so teams do not lose their sense of community.
- Utilize behavior change technologies like ProHabits to help your team stay connected, maintain a positive outlook and work effectively in their new home office.
These are difficult times for everyone. A company’s investment in its workforce is going to determine how quickly it recovers after COVID-19. Paying attention to employees during this pandemic is what can prevent a company from ending up worse off in the long run.