The National Bureau of Economic Research published an article titled “Analyzing the Aftermath of a Compensation Reduction” exploring reasons why employers are more likely to lay off workers than reduce their compensation.  This inclination to lay off workers instead of reducing compensation is referred to as “pay rigidity”.  The authors of the article establish two possible reasons for pay rigidity. First is the suggestion that pay cuts could compel higher-performing workers to leave the company, reducing the quality of the workforce.  Second is that pay cuts could cause workers to exert less effort, reducing output and productivity.  These potential explanations were supported by management surveys and short-term laboratory experiments.

To further investigate these explanations, the authors used data from a digital sales company that reduced commissions by 18% for certain workers.  The turnover rate of top-performing workers increased by nearly 50% and stayed around the same for workers with average performance. Productivity did not appear to respond negatively even across employees who had different attitudes towards the company before compensation was reduced. This leads the authors to favor the explanation of pay rigidity by which reducing worker pay causes top performers to leave the company for a different position.

You can read more about this on the Bureau of Labor Statistics overview of the article, and view the article on the National Bureau of Economic Research website.