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Does worker loyalty pay? Evidence from transition economies

Susan Linz, Linda Good and Michael Busch
Michigan State University, East Lansing, Michigan, USA
Abstract
Purpose Does worker loyalty benefit workers? This paper aims to address this question. Design/methodology/approach Using data collected from over 10,880 employees in more than 655 workplaces in six transition economies, the authors first document the nature of worker loyalty using three alternative measures. They use ordered probit regression analysis to investigate links between loyalty, expected rewards, and performance. Second, they use OLS regression analysis to identify the association between earnings and loyalty. Findings Among participants in this study, loyalty is positively associated with expected rewards and performance. Loyalty also is positively associated with earnings. In three cases, loyalty has larger influence on earnings than an additional year of experience. Research limitations/implications Country samples are not nationally representative; data are cross-sectional rather than longitudinal. Practical implications What strategies might firms adopt to install or enhance worker loyalty? Originality/value This paper uses multiple loyalty measures and comparable data collected from culturally and economically diverse countries. It undertakes explicit consideration of benefits to workers associated with loyal behavior. Keywords Personnel economics, Well-being at work, Labour economics, Employee motivation, Economics, Organizational economics, Employees behaviour Paper type Research paper

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Evidence-based HRM: A Global Forum for Empirical Scholarship Vol. 1 No. 1, 2013 pp. 16-40 r Emerald Group Publishing Limited 2049-3983 DOI 10.1108/20493981311318593

1. Introduction It is widely accepted that worker loyalty is good for a firms bottom line[1]. Loyal workers those actively engaged in their organization and its objectives, who are committed to their organizations success, and who neither seek alternative employment nor respond to other offers even when offered slightly higher pay (Insightlink, 2004; Niehoff et al., 2001) tend to exhibit higher productivity (Drizin and Schneider, 2004; Silvestro, 2002; Yee et al., 2010; Yousef, 2000). Loyal workers lower labor turnover costs, which firms consider a significant benefit because replacement costs are estimated to range from one to five times the workers salary, and may reflect as much as 25 percent of a firms annual profit (Branham, 2000; Hirschman, 1970; Hoffman, 2006; Mayfield and Mayfield, 2002; Ton and Huckman, 2008). Loyal workers can increase revenue and long-term profit because they provide enhanced customer service, leading to customer base expansion and increased sales (Duboff and Heaton, 1999; Insightlink, 2004; Olympic Performance Inc, 2009). While a large literature documents the benefits to firms of worker loyalty, missing are studies which investigate whether and to what degree loyalty benefits the worker. Does worker loyalty pay? We analyze the link between loyalty and earnings using data collected from over 10,800 employees in over 665 workplaces in six formerly socialist economies: Armenia, Azerbaijan, Kazahkstan, Kyrgyzstan, Russia (part of the former Soviet Union) and Serbia (part of the former Yugoslavia); countries that, as domestic and international conditions stabilize, are likely to become important markets

and production centers in the global economy. Our objective is threefold. First, using three alternative loyalty measures, we document the nature and scope of worker loyalty among participants in our survey. Second, we investigate whether the positive links between loyalty, expected rewards and performance commonly found in studies conducted in developed market economies emerge among our survey participants. Third, we use regression analysis to determine whether there is a positive association between earnings and loyalty among participating workers in the six countries included in our analysis. Given the cross-section nature of our data, we are not able to establish causality in these relationships, but we can (and do) illuminate similarities that emerge among participating workers in these economically and culturally diverse countries. Thus we take a step toward establishing the foundation for developing a more global perspective of factors associated with worker loyalty, and, more generally, worker performance. Our study makes several contributions to the loyalty literature. For example, using multiple loyalty measures allows us to unite two strands in the literature. In management and psychology, loyalty typically is measured rather broadly using variables related to organizational commitment or engagement, and studies tend to focus on the links between loyalty, performance and expected rewards. In economics, loyalty is measured more narrowly by using workplace tenure (seniority), and studies focus on the link between loyalty and earnings. We explicitly address this disciplinary divide by using both types of measures to assess the links between loyalty and expected rewards, and loyalty and earnings. As such, we provide information on the extent to which alternative measures generate similar results among the participants in our study. In addition, we address the disciplinary divide by utilizing both types of performance measures: earnings and self-reported performance, acknowledging that our results may be subject to biases due to measurement error. Finally, we extend the analysis of worker loyalty by utilizing data collected from employees in countries beyond the cultural zone of the European Union. More importantly, because our sample includes a wide variety of workplace types (manufacturing, health, education, retail and other services, construction and transportation, for example), our analysis is not limited to a single firm or occupation. Consequently, our data are well suited to systematically explore whether positive links between loyalty, expected rewards and performance found in studies conducted in developed market economies also are evident among participating workers in these formerly socialist economies. We do so with an eye toward highlighting commonalities, so that we might contribute to developing a global perspective of factors influencing worker performance. Does worker loyalty pay? Our investigation proceeds as follows: Section 2 presents our loyalty measures. Section 3 describes our country samples and summarizes the worker loyalty results by country, as well as provides a brief descriptive analysis of the expected rewards and performance measures used in this analysis. In Section 4, to document the nature and scope of loyalty among our survey participants, we analyze the links between loyalty and expected rewards, and loyalty and self-reported performance. Given the nature of our loyalty, expected reward and self-reported performance variables categorical variables ranked from low to high we employ ordered probit regression analysis to examine whether positive links reported in existing studies also emerge among the employees participating in our study. Clustering by firm and controlling for select worker and workplace characteristics, we find that, generally, loyalty is positively associated with expected rewards, which is consistent with existing studies. Moreover, comparable to studies

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conducted in developed market economies, a positive and statistically significant relationship emerges between loyalty and performance for all six countries included in our analysis. We find little evidence that workplace tenure (seniority) is a good proxy for worker loyalty among the participants of our study. In Section 5, we focus on the link between loyalty and earnings. Using OLS regression analysis, clustering by firm, we find that loyalty is positively associated with earnings among participating workers in these six countries. In the basic specification, loyalty is statistically significant among Armenian, Azeri, Kyrgyz and Russian participants. Indeed, among Armenian, Azeri and Kyrgyz employees, the magnitude of the loyalty effect is equal to or greater than that associated with an additional year of experience. In an extended specification which captures features of labor market conditions in transition economies, loyalty continues to exhibit a positive and significant association with earnings (Armenia, Azerbaijan, Kazakhstan, Kyrgyzstan). Thus our results suggest that for the majority of participating employees, loyalty pays. Discussion and concluding remarks are offered in Section 6. 2. Measuring worker loyalty Loyalty, as an organizational term relating to employees rather than customers, emerged from managers efforts in the 1970s and 1980s to build consumer loyalty to stores and brands (Bellenger et al., 1976; Parasuraman, 1983). Firms noted that, just as retaining existing customers is financially beneficial, retaining existing employees who do their job well is significantly less costly than attracting new ones. Labor retention improves productivity as firm-specific human capital is developed and exploited. Furthermore, studies indicate that encouraging organizational commitment and engagement what came to be called worker loyalty has the added benefit of positively influencing consumer loyalty (Allen and Grisaffe, 2001; Boyle, 1990; Heskett et al., 1997; Sirdeshmukh et al., 2002; Webster, 1994). The worker loyalty literature reveals three basic constructs: loyalty as measured by the degree of organizational commitment and engagement (Berntson et al., 2010; Carson et al., 2006; Hoffman, 2006; Mellahi et al., 2010; Meyer and Allen, 1991; Yee et al., 2010, for example); loyalty as measured by workplace tenure or seniority (Altonji and Williams, 2005; Bingley and Westergaard-Nielsen, 2003; Borzaga and Tortia, 2006; Foster et al., 2008; Hirschman, 1970; Hoffman, 2006; Pfann and Hamermesh, 2008; Silvestro, 2002); and loyalty as an emotional attitude or a reflection of a workers values (Coughlan, 2005; Hajdin, 2005). Given the empirical nature of our research objective, we concentrate on the first two loyalty constructs. Because worker loyalty tends to include more than job performance loyal workers are willing to make decisions and act in accordance with the long-term well-being of the company (Abdullah et al., 2011; Hajdin, 2005; Mathieu and Zajac, 1990) our preferred measure of worker loyalty focusses on organizational commitment and engagement, and consists of six items adapted from Cook and Wall (1980). Following Allen and Meyer (1990), Berntson et al. (2010), among others, we include three items that reflect a passive (and unobservable by managers) attachment to the organization: I feel myself to be part of the organization; even if the company were not doing well financially, I would be reluctant to change to another company; and I sometimes feel like leaving this company for good. Following Drizin and Schneider (2004), Sweetman (2001), Yee et al. (2010) and others, we also include three items that reflect an active (and observable by managers) attachment to the organization: I am proud to be able to tell people the company where I work; the offer of a little more money with

another company would not make me seriously think of changing jobs; and I would recommend a close friend to join this company. In all six cases, the response options included a five-point scale where 1 strongly disagree and 5 strongly agree. To maintain consistency higher numbers reflect greater loyalty the third item was reverse coded. The composite measure (loyalty) has a minimum value of six and maximum value of 30. Two single-item measures are also possible options for investigating worker loyalty. One stems from studies which use workplace tenure or seniority in their analyses: How many years have you worked at this organization (tenure)? Longer workplace tenure is associated with higher worker loyalty[2]. We include a second single-item measure because our main objective is to analyze the link between loyalty and earnings, and we would like to have a loyalty measure which we can separate, albeit roughly, from earnings. Consequently, we utilize one of the items from our composite measure: The offer of a little more money at another company would not seriously make me think of changing jobs (notchgjob) with respondents given a scale of 1-5, where 1 strongly disagree and 5 strongly agree. Loyal workers would score high on this statement. Since both of these single-item measures, tenure and notchgjob, may reflect outcomes unrelated to loyalty (restricted employment opportunities, or strong location/ geographic preferences, for example), both are viewed as less desirable than the composite measure. Our study is unique, however, in providing alternative loyalty measures, as well as multiple performance measures (earnings, comparative performance). As such, using data collected from over 10,880 employees in six formerly socialist economies, we take a preliminary step in addressing the disciplinary divide in the loyalty literature. 3. Data description Under the auspices of a project designed to investigate factors influencing worker performance in formerly socialist economies, an employee survey was conducted in Russia, Armenia, Azerbaijan, Kazakhstan, Kyrgyzstan and Serbia[3]. Local project coordinators contacted over 700 workplaces to request permission to conduct the survey. In organizations where permission was granted, the questionnaire was administered in common areas or at specific job sites in the workplace. If workers agreed to participate, they had the option of returning a complete or incomplete questionnaire. More than 10,880 employees in over 665 workplaces participated. A detailed description of the sample selection process is available upon request. While cost constraints precluded generating a representative sample in any of the countries, our convenience samples represent a wide variety of workers and workplaces, and involve multiple geographic locations in each country. For the purposes of this paper, we restrict the country samples to include only those participants who answered all questions relevant to this analysis of worker loyalty, giving us a total of 8,308 observations. For simplicity, we utilize the country name to refer to participating workers from that country. Sample characteristics are summarized by country and gender in Table I. As seen in Table I, the average participant was in their mid- to late-30s with over 14 years of schooling[4] at the time of the survey. About half of the participating workers are female in Armenia, Kazakhstan and Serbia (40 percent in Azerbaijan); over two-thirds in Kyrgyzstan and Russia are female. While participating employees in all countries report, on average, at least five years at their current workplace, among participants in Azerbaijan, Kyrgyzstan and Russia, workplace tenure is somewhat

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Worker characteristics Age (at time of interview, years)

Years of schooling

Job tenure (years at current workplace)

Average earnings (local currency)

Married (%) Supervisor (%) Received promotion (%) Holds multiple jobs (%) Experience w/unemployment (%) Workplace characteristics State owned (%) Manufacturing (%) Education/health care (%) Retail and other services (%) Finance (%) Public sector (local, region, federal) Construction/transportation (%) 36.2 26.2 22.3 29.7 2.3 16.4 2.4 37.3 20.7 15.1 30.7 3.5 25.8 3.5 20.4 31.6 12.2 34.6 3.6 14.2 3.9 30.8 17.8 17.5 36.0 6.1 21.5 1.1 84.9 0.6 5.2 7.0 2.0 84.1 1.2 84.7 0.5 17.6 6.4 1.4 73.9 0.2

Notes: Russia: employee survey conducted in Rostov region (2002), Sverdlovsk region (2003), Bashkortostan autonomous republic (2005); Serbia: employee survey conducted in Belgrade (2008), Novi Sad (2009); Armenia: employee survey conducted in Yerevan (2005) and Shirak region (2008); Kyrgyzstan: employee survey conducted in Bishkek (2007) and Kara Balta (2008); Kazakhstan: employee survey conducted in Almaty, Taldyquorghan, and surrounding locales (2005); Azerbaijan: employee survey conducted in Baku, Sumgait, Shabran, Sabirabad (2011)

Table I. Sample characteristics (by country and gender) Armenia Men Women Kazakhstan Men Women Kyrgyzstan Men Women Russia Men Women Serbia Men Women Azerbaijan Men Women 38.8 (11.7) 15.2 (2.2) 6.9 (6.8) 93,061 (77,323) 54.2 42.2 45.9 16.3 28.1 26.0 47.4 17.0 19.8 2.4 4.8 8.6 42.9 39.4 33.9 16.9 0.3 6.5 2.9 37.6 (12.1) 15.1 (2.0) 7.0 (7.8) 82,119 (70,588) 43.8 30.7 43.1 12.8 28.6 33.0 (9.3) 14.5 (2.4) 4.6 (3.7) 30,872 (44,989) 59.0 39.7 40.3 10.0 41.7 33.2 (8.5) 14.9 (2.1) 5.1 (4.5) 24,360 (14,151) 58.3 48.3 39.2 8.6 39.0 38.2 (12.2) 15.0 (3.5) 6.4 (7.5) 4,040 (3,226) 65.5 39.5 47.8 18.3 46.5 39.7 (12.3) 14.5 (3.6) 9.9 (9.9) 3,147 (1,752) 52.1 30.9 45.1 11.7 56.0 37.9 (12.4) 14.4 (3.0) 8.3 (7.8) 6,795 (6,506) 62.8 45.5 56.6 19.1 20.0 38.4 (11.3) 14.3 (2.6) 10.1 (9.3) 4,351 (3,142) 55.3 31.4 50.2 11.8 20.2 38.1 (8.2) 14.1 (2.0) 7.8 (5.5) 54,131 (21,430) 63.3 25.0 36.1 4.4 27.4 47.7 25.7 7.9 20.2 15.2 20.3 10.7 37.0 (8.3) 14.4 (2.0) 7.1 (5.5) 52,547 (19,890) 51.3 22.3 39.4 2.5 33.6 44.9 23.2 11.9 24.1 16.7 20.4 3.8 33.0 (9.1) 13.6 (2.8) 4.7 (6.0) 447 (353) 57.8 37.0 50.2 21.0 45.7 21.0 41.6 13.3 18.8 11.1 6.9 8.4 32.3 (9.8) 13.9 (2.6) 6.3 (7.9) 266 (166) 50.1 19.4 37.0 10.9 37.1 35.1 32.5 39.0 15.0 5.6 7.5 0.3

longer for women. Over half of the participants were married at the time of the survey (except among female Armenian participants). In all but Kazakhstan, employees who held supervisory positions were more likely to be male[5]. In all but Serbia (and women in Kazakhstan), 10 percent or more of the participants held multiple jobs at the time the survey was conducted; substantially more (20-56 percent), in all countries, report experience with unemployment. Not surprisingly, women on average earn less than men. Participating employees worked in a wide variety of organizations, the majority of which, in all but Kyrgyzstan, were privately owned[6]. At least 20 percent worked in manufacturing (except Kyrgyzstan); in Russia and Azerbaijan, the figure is closer to 40 percent. Retail and other services account for about one-third of participating workers in Armenia and Kazakhstan, and about 20 percent of those in Russia, Azerbaijan and Serbia. Three-quarters of the participating workers in Kyrgyzstan were employed in the public sector (local, regional or federal government offices, or NGOs). Education and health care represent between 10 and 30 percent of the participating workers, depending upon the country. Relatively few participants were employed in the financial sector or in the construction or transportation sectors. In sum, while not representative of the national workforce or the sectoral distribution of firms in these countries, the country convenience samples are large and include a wide variety of workers and workplace types from multiple geographic locations. Thus we are able to empirically investigate worker loyalty, controlling for a number of worker and workplace characteristics. 3.1 Worker loyalty in formerly socialist economies We focus first on the composite measure, loyalty[7], described in Section 2. Despite little difference in the mean score, ranging from 18 in Serbia and Azerbaijan to 22 in Kazakhstan (see Figure 1), we note country differences in the distribution of worker loyalty. That is, for illustrative purposes, in our descriptive analysis we arbitrarily define four categories to reflect different levels of worker loyalty: strong refers to a score of 24 (of 30) or more; moderately strong refers to a score of 18-23; moderately weak refers to 12-17; and weak is a score below 11. The categories are constructed solely to illustrate the pattern of worker loyalty among participants in these six countries. For example, as seen in Figure 1, about one-third of the participating workers in Armenia and Kazakhstan, and just over one-quarter in Kyrgyzstan and Russia, exhibit strong loyalty. Yet, in Serbia, only 5 percent do so. We use correlation coefficients to capture the relationship between the three loyalty measures. The correlation between loyalty and tenure ranges between 0.03 (Armenia) and 0.53 (Kazakhstan), so we are skeptical about the validity of using seniority as a proxy for loyalty in this analysis. A higher correlation is evident between the loyalty and notchgjob ranging between 0.45 (Kyrgyzstan) and 0.80 (Armenia). To maximize clarity, we focus our analysis on loyalty, reporting results associated with tenure and notchgjob where appropriate. Systematic statistical analysis of the loyalty measures is undermined by data limitations. However, we are able to offer preliminary evidence about whether the different loyalty measures generate similar results among the participants in our study. 3.2 Expected rewards Since one specific aim of this paper is to investigate the link between loyalty and expected rewards (we hypothesize a positive association), we need to identify which rewards workers expect to receive. Respondents were given a list of 11 possible

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0.7 0.6 0.5

Weak Moderately weak Moderately strong Strong

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0.4 0.3 0.2 0.1 0 Armenia (21.1) Kazakhstan (21.9) Kyrgyzstan (20.0) Russia (20.6) Azerbaijan (18.3) Serbia (18.8)

Figure 1. Loyalty distribution, by country

rewards[8] and asked, for each one, what would be the likelihood of receiving that reward in response for doing their job particularly well. Table II reports the results by country; the odd columns provide mean scores and the even columns summarize the percentage of respondents who selected very likely for each expected reward. The rewards are divided into extrinsic and intrinsic categories in order to assess whether significant differences in expectations emerge. For example, workers may successfully sort into jobs that have characteristics they desire, such as chance to learn new things, friendly co-workers or chance to accomplish something worthwhile. Thus, their expectation of receiving such intrinsic rewards would be relatively high. Workers may have little control over company policy related to bonus payment and promotion, thus their expectation of receiving such extrinsic rewards may be relatively low. Consequently, if there is a high incidence of successful sorting/job match, as would occur in a competitive and flexible labor market, we would expect to find higher expectations for intrinsic rewards in comparison to extrinsic rewards. While it is unlikely that competitive and flexible local labor market conditions are in place in these six countries (Rutkowski, 2006), it remains worthwhile to examine potential differences between extrinsic and intrinsic rewards in order to help establish a foundation for analyzing worker loyalty and, more generally, worker performance. As seen in Table II, expectations, generally, are relatively low regarding the likelihood that any of these 11 rewards will actually be received. Among Serbian participants, in particular, the percentage reporting very likely reaches double digits in only four of the 11 cases. Only among participants from Kazakhstan does the percentage selecting very likely consistently exceed one-third. In terms of differences in expectations between intrinsic and extrinsic rewards, our data indicate statistically

Armenia Very likely Meana (%)

Kazakhstan Very likely Meana (%)

Kyrgyzstan Very likely Meana (%)

Russia Very likely Meana (%)

Serbia Very likely Meana (%)

Azerbaijan Very likely Meana (%)

Extrinsic rewards Receive bonus/pay increase Have better job security Be promoted/get better job Supervisor will praise Respected by co-workers Intrinsic rewards Chance to learn new things Accomplish something worthwhile Freedom at work, on the job Friendly co-workers Job makes me feel good about myself Chance to develop skills 3.1 3.6 3.2 3.5 3.7 3.6 3.6 3.4 3.6 3.7 3.7 (1.2) (1.2) (1.2) (1.2) (1.1) (1.2) 26.7 24.8 19.5 27.9 30.3 30.8 3.9 (1.0) 3.9 (1.0) 3.8 (1.1) 4.1 (0.9) 4.1 (0.9) 4.1 (0.9) 35.4 32.0 29.9 42.5 35.6 38.0 3.6 (1.3) 4.0 (1.1) 3.2 (1.4) 4.0 (1.1) 4.0 (1.1) 4.1 (1.1) 29.1 39.0 21.0 39.6 39.2 43.4 3.4 (1.3) 3.6 (1.3) 2.9 (1.3) 3.9 (1.1) 3.9 (1.1) 3.8 (1.2) 25.0 29.7 13.1 32.9 37.5 34.9 (1.4) (1.2) (1.3) (1.2) (1.2) 19.9 25.2 19.3 24.7 28.5 3.7 4.0 3.7 3.9 4.1 (1.2) (1.0) (1.2) (1.1) (0.9) 28.7 37.6 31.3 31.9 36.9 2.6 3.6 2.9 3.3 3.9 (1.5) (1.3) (1.4) (1.3) (1.1) 16.8 28.2 15.8 20.2 37.1 2.9 3.7 2.6 3.3 3.8 (1.4) (1.2) (1.4) (1.3) (1.1) 16.2 32.1 11.0 18.3 31.5 3.0 3.6 2.8 3.3 3.4

(1.2) (0.9) (1.0) (0.8) (0.8) 3.1 (1.1) 3.2 (0.9) 3.4 (0.7) 3.6 (0.8) 3.3 (0.9) 3.3 (1.0)

10.4 13.9 5.1 5.2 8.9 9.1 7.8 3.6 10.6 8.9 10.8

3.2 (1.3) 3.3 (1.3) 3.3 (1.2) 3.6 (1.3) 3.9 (1.1) 3.4 (1.3) 3.3 (1.4) 3.3 (1.4) 3.8 (1.1) 4.1 (1.0) 3.6 (1.2)

19.6 22.3 19.1 33.0 36.2 27.7 24.0 25.8 36.1 43.9 31.5

Note: aMean derived using five-point scale, where 1 not very likely and 5 very likely (standard deviations in parentheses)

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Table II. Expected rewards, by country

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significant higher expectations for intrinsic rewards, ranging from a 1 to 2 percent difference in intrinsic-extrinsic means (Serbia, Azerbaijan) to an 11 percent difference in means (Kyrgyzstan)[9]. As seen in Table II, among participants from all six countries, additional pay[10], promotion and more freedom on the job are associated with relatively low expectations, with praise from supervisor also relatively low in all but Azerbaijan. Friendly and respectful co-workers, chance to develop skills, better job security and a job that makes me feel good about myself appear to be viewed as more likely to occur. 3.3 Performance To document the nature of worker loyalty among workers in formerly socialist economies and to enhance comparability with studies conducted in developed market economies, we explore the link between loyalty and performance, hypothesizing a positive association. Our primary performance measure is earnings. We asked each respondent to report their average monthly earnings at the workplace where the interview took place. Those results are reported in Table I. Our second performance measure is a composite variable constructed using three statements that asked participants to compare their performance with others doing similar work[11]. For each option, a scale of 1 ( much worse than others) to 5 ( much better than others) was provided. Thus the composite measure has a minimum value of 3 and maximum value of 15. For illustrative purposes, we arbitrarily construct three categories: worse score between 3 and 8; same score between 9 and 10; better score between 11 and 15. These categories are constructed solely to illustrate the response patterns for the composite performance measure, perform, by country (see Figure 2).
70 60 50 40 30 20 10 0
Kazakhstan (10.4) Krygyzstan (10.4) Azerbaijan (10.7) Armenia (10.7) Russia (10.3) Serbia (11.0)

Worse Same Better

Figure 2. Performance, by country

As seen in Figure 2, while Armenian participants are rather evenly split between reporting better or same, both Serbia and Azerbaijan have a significantly higher number of participating employees who self-report performing better than others doing similar work, especially when compared to participants from Kazakhstan, Kyrgyzstan and Russia. Those who report themselves performing worse tend to account for o5 percent of the participants. 4. Expected rewards, performance and worker loyalty Given the categorical nature of our variables, ranked low to high, we use ordered probit regression analysis to assess whether the positive relationship between loyalty and expected rewards (Berntson et al., 2010; Foster et al., 2008; Hart and Thompson, 2007) and between loyalty and performance (Drizin and Schneider, 2004; Silvestro, 2002; Yee et al., 2010; Yousef, 2000) found in studies conducted in developed market economies also hold among the participating workers in these six formerly socialist economies. 4.1 Worker loyalty and expected rewards To analyze the link between loyalty and expected rewards, we use the following model: Loyalty a bX g ExpectedRewards e where X is a set of explanatory variables that include: age, age-squared, education, average earnings at the firm, dummy variables for female workers, marital status, supervisory responsibilities, state ownership and sector (education, services, finance, construction and so forth; with manufacturing as the omitted sector); ExpectedRewards includes ten of the 11 rewards listed in Table II[12], each standardized by country to have a zero mean and unit standard deviation. We first use the loyalty composite measure described in Section 2, loyalty, standardized by country to have zero mean and unit standard deviation. We repeat the analysis using the two single-item measures: tenure and notchgjob. Our objective is simply to document whether the results obtained are roughly similar for each loyalty measure. In each specification we cluster by firm in order to take into account possible collinearity among workers in a particular organization; that is, the unobserved characteristics may be correlated among workers within a firm (Wooldridge, 2002). Regression results for the composite loyalty measure are reported in Table III. As seen in the top panel of Table III, more often than not, we find positive associations between loyalty and expected rewards among the participating workers in our study. In particular, our results suggest that worker loyalty is positively linked to several expected extrinsic rewards: (expected) bonus is statistically significant in all but Serbia; respect of co-workers is significant among participating Armenian, Kazakh and Russian workers. While two expected rewards often cited in studies conducted in developed market economies, job security and praise from supervisor, are positively linked to loyalty, they are only statistically significant in two countries: Russia/Azerbaijan, and Krygyzstan/Russia, respectively. Significant positive relationships emerge for expected intrinsic rewards, as well. For chance to accomplish something worthwhile, more freedom on the job and chance to acquire new skills, the positive relationship is statistically significant in at least three of the six countries. Quite surprising are the negative coefficients on more freedom on the job and expect that job will make me feel better about myself among

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Expected rewards Additional pay, bonus Job security

Armenia Kazakhstan Kyrgyzstan

Russia

Serbia

Azerbaijan

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Promotion Praise from supervisor Respect of co-workers Accomplish something worthwhile

0.0922* 0.106*** 0.163*** (0.0473) (0.0727) (0.0420) 0.0399 0.0358 0.0276 (0.0421) (0.0371) (0.0432) 0.0477 0.0471 0.00522 (0.0464) (0.0470) (0.0470) 0.0535 0.0346 0.0931** (0.0495) (0.0472) (0.0396) 0.0908* 0.195** 0.0333 (0.0536) (0.0873) (0.0415) 0.0511 (0.0390) 0.0511 (0.0412) 0.150*** (0.0363) 0.0550 (0.0361) 0.0870** (0.0424) 0.0362 (0.0239) 0.0699** (0.0314) 0.0026 (0.0150) 0.0422 (0.1000) 0.0721 (0.0661) 0.112 (0.0851) 0.0780 (0.1190) 0.2170 (0.1380) 0.104 (0.141) 0.1610 (0.1000) 0.220 (0.1860) 0.357*** (0.1620) 0.0671* (0.0373) 0.115*** (0.0437) 0.0516 (0.0554) 0.0276 (0.0571) 0.0012 (0.0386) 0.0356** (0.0179) 0.0487** (0.0210) 0.0014 (0.0094) 0.221** (0.0972) 0.111 (0.0779) 0.271** (0.1130) 0.396*** (0.129) 0.305** (0.125) 0.224 (0.158) 0.629*** (0.121)

0.0907*** 0.0203 (0.0351) (0.0528) 0.0960** 0.0336 (0.0389) (0.0427) 0.0415 0.0795 (0.0410) (0.0776) 0.0958** 0.0412 (0.0436) (0.0339) 0.108*** 0.0309 (0.0456) (0.0426)

0.182*** (0.0454) 0.122** (0.0533) 0.0807* (0.0469) 0.0428 (0.0521) 0.0349 (0.0487)

0.0949* (0.0509) Freedom on the job 0.139** (0.0560) Friendly co-workers 0.0457 (0.0640) Feel better about myself 0.0261 (0.0441) Acquire new skills 0.0701 (0.0430) Worker and workplace characteristics Age 0.0235 (0.0192) Age squared/100 0.0272 (0.0228) Years of education 0.0233* (0.0122) Respondents sex 0.0778 (0.0722) Supervisory responsibilities 0.135** (0.0663) Married 0.133 (0.0781) Married woman 0.0046 (0.104) State-owned organization 0.0187 (0.105) Health/education organization 0.146 (0.131) Service organization 0.0559 (0.0956) Financial services organization 0.144 (0.2460) Public organizations (national, regional, local) 0.113 Table III. (0.1440) Ordered probit regression results loyalty, expected rewards

0.159*** 0.0092 0.360*** (0.0421) (0.0556) (0.0541) 0.0051 0.0982*** 0.0972** (0.0385) (0.0428) (0.0406) 0.0103 0.0126 0.0722 (0.0444) (0.0336) (0.0531) 0.0531 0.106** 0.0867* (0.0341) (0.0417) (0.0518) 0.0813***0.0139 0.295*** (0.0327) (0.0591) (0.0590) 0.0154 (0.0173) 0.0334 (0.0216) 0.0131 (0.0108) 0.0692 (0.0925) 0.190*** (0.0606) 0.0849 (0.0994) 0.0705 (0.106) 0.373*** (0.122) 0.349*** (0.123) 0.0072 (0.123) 0.0723 0.0236 (0.0627) (0.0347) 0.0948 0.0623 (0.0780) (0.0458) 0.0321* 0.0137 (0.0175) (0.0166) 0.0979 0.0197 (0.104) (0.0966) 0.0068 0.0470 (0.112) (0.0806) 0.223** 0.0070 (0.0740) (0.0946) 0.118 0.0497 (0.155) (0.1216) 0.344*** 0.0058 (0.132) (0.1785) 0.236 0.480** (0.331) (0.2419) 0.299 0.220 (0.339) (0.2719) 0.174 (0.281) 0.0973 (0.311) 0.553*** (0.2083) 0.353 (0.2269)

0.346** 0.0650 (0.164) (0.259) 0.216* (0.130) 0.247 (0.215)

(continued)

Armenia Kazakhstan Kyrgyzstan Construction/transportation 0.0097 (0.1830) Average earnings at firm 0.181*** (0.0650) Constant 4.036*** (0.8310) Observations 1,459 0.186 (0.2080) 0.0399 (0.0945) 1.566** (1.0710) 1,392 0.291* (0.159) 0.0219 (0.0436) 1.568** (0.624) 1,189

Russia 0.322* (0.194)

Serbia 0.141 (0.319)

Azerbaijan 0.727*** (0.2644)

Does worker loyalty pay?

0.0848 0.560*** 0.0015 (0.0807) (0.207) (0.1851) 2.965*** 8.683*** 3.492*** (0.869) (2.771) (1.390) 1,756 1,420 1,092

27

Notes: Standard errors in parentheses. ***po0.01; **po0.05; *po0.1

Table III.

Azeri workers. Eliciting information from focus groups would likely facilitate interpretation of this result. Who are the loyal workers? As seen in the bottom panel of Table III, among the participants in this study, loyalty appears to be U-shaped with respect to age: the youngest and oldest workers are most loyal. We note positive associations between loyalty and education, and loyalty and supervisory responsibilities; relationships which are statistically significant among Armenian and Serbian workers (education), and Armenian, Kyrgyz and Russian workers (supervisory responsibilities). Generally, loyalty tends not to vary by gender or marital status among the participants in this study. Significant links are mainly observed among Kyrgyz workers: women and married workers exhibit lower loyalty, although, among married Kyrgyz women, loyalty is higher. Employees in state-owned organizations, on average, exhibit higher loyalty in Kyrgyzstan and Serbia; the opposite holds true for workers in Kazakhstan and Russia. Where statistically significant differences emerge across sectors, worker loyalty among participants in all six countries is higher in non-manufacturing sectors in comparison to manufacturing. This is especially evident among participating Azeri workers. Finally, worker loyalty tends to be positively associated with peers earnings calculated here as the average earnings of other participating workers at the same organization. For illustrative purposes, we repeat our analysis using the two single-item loyalty measures. When tenure is the loyalty measure, we find in many cases a negative relationship with expected rewards[13]. Similarly, the opposite pattern holds for many worker and workplace characteristics[14]. Thus we conclude that workplace seniority (tenure) is not an effective proxy for loyalty among the employees participating in our survey. However, when we use notchgjob (standardized by country to have zero mean and unit standard deviation) as the dependent variable, the pattern of positive and significant coefficients on the expected reward variables is largely the same as reported in Table III. A similar pattern of results also holds for worker and workplace characteristics. The evidence thus suggests that notchgjob, among our survey participants, is a reasonable proxy for the composite loyalty measure. 4.2 Worker loyalty and performance To further our understanding of the nature of worker loyalty in transition economies, we analyze the link between loyalty and performance using the following model: Loyalty a bX g Perform e

EBHRM 1,1

28

where Perform is the composite performance measure described in Section 2, standardized by country to have zero mean and unit standard deviation, and the controls for worker and workplace characteristics (X) are as described above. Our regression results using the loyalty composite measure are reported in Table IV. A positive link between loyalty and perform is evident in Table IV; the coefficient is statistically significant in all six countries. We note that the pattern of statistical significance and coefficient signs for the worker and workplace controls in the loyalty/

Armenia Perform

Kazakhstan Kyrgyzstan 0.0484* (0.0290)

Russia 0.0918*** (0.0290)

Serbia 0.0619** (0.0306) 0.0658 (0.0574) 0.0879 (0.0714) 0.0163 (0.0184) 0.0831 (0.103)

Azerbaijan 0.231*** (0.0511) 0.0195 (0.0334) 0.0457 (0.0432) 0.0175 (0.0201) 0.0154 (0.09630

Table IV. Ordered probit regression results loyalty, performance

0.0983*** 0.0613** (0.0267) (0.0351) Worker and workplace characteristics Age 0.0486** 0.0354 (0.0190) (0.0248) Age squared/100 0.0503** 0.0570* (0.0222) (0.0320) Years of education 0.0254** 0.0268 (0.0127) (0.0176) Respondents sex 0.0828 0.0236 (0.0744) (0.106) Supervisory responsibilities 0.170*** 0.0317 (0.0648) (0.0638) Married 0.181** 0.173** (0.0791) (0.0858) Married woman 0.0797 0.0052 (0.106) (0.128) State-owned organization 0.0641 0.204 (0.115) (0.143) Health/education organization 0.255** 0.137 (0.125) (0.136) Service organization 0.0425 0.353*** (0.0958) (0.105) Financial services organization 0.0155 0.277 (0.122) (0.194) Public organizations (national, regional, local) 0.204 0.436*** (0.150) (0.162) Construction/ transportation 0.0302 0.307 (0.203) (0.273) Average earnings at firm 0.208*** 0.109 (0.0640) (0.105) Constant 3.728*** 1.195 (0.809) (1.109) Observations 1,459 1,392

0.0492*** 0.0237 (0.0172) (0.0178) 0.0618*** 0.0385* (0.0200) (0.0227) 0.0051 0.0092 (0.0091) (0.0108) 0.257** 0.0287 (0.103) (0.0998) 0.113* (0.0734) 0.268** (0.117) 0.422*** (0.133) 0.312*** (0.120) 0.287 (0.141) 0.744*** (0.100) 0.480 (0.133) 0.232* (0.120) 0.624*** (0.120) 0.0630 (0.0457) 0.748 (0.602) 1,189 0.192*** (0.0645) 0.107 (0.108) 0.0762 (0.112) 0.403*** (0.138) 0.335** (0.139) 0.0055 (0.139) 0.0967 (0.242) 0.274 (0.210) 0.334* (0.201) 0.0942 (0.0836) 2.733*** (0.895) 1,756

0.0100 0.0161 (0.118) (0.0876) 0.212*** 0.0563 (0.0790) (0.0889) 0.117 0.0559 (0.154) (0.1224) 0.321** (0.136) 0.182 (0.314) 0.326 (0.322) 0.115 (0.268) 0.0849 (0.305) 0.226 (0.275) 0.0291 (0.2376) 0.871*** (0.3275) 0.361 (0.3525) 0.799*** (0.2511) 0.744*** (0.2994) 1.142*** (0.2264)

0.564*** 0.0088 (0.207) (0.2195) 8.513*** 4.532*** (2.725) 1.5612 1,420 1,092

Notes: Standard errors in parentheses. ***po0.01; **po0.05; *po0.1

performance regression (Table IV) is largely similar to the expected reward/loyalty results (Table III). That the controls have same effect in both specifications suggests robustness in the characteristics of loyal workers. For illustrative purposes, we repeat our regression using the two single-item loyalty measures: tenure and notchgjob. When tenure is the loyalty measure, perform is positive in all six countries, but not statistically significant. In the notchgjob specification, perform is positive in four of the six countries, and statistically significant in Russia and Azerbaijan. Our analysis suggests that the positive associations between worker loyalty, expected rewards and performance, described in studies conducted in developed market economies, also hold for the participating employees our project. Thus, our first objective of documenting the nature of worker loyalty in these culturally different countries using the expected reward and performance constructs is accomplished. Moreover, we provide preliminary evidence in support of accepting notchgjob as a single-item measure to proxy for worker loyalty, and rejecting workplace seniority (tenure) as an effective proxy for worker loyalty in former socialist economies. We now turn to our primary objective does worker loyalty pay? 5. Loyalty and earnings We model the link between loyalty and earnings by specifying a log earnings equation: ln w a bX d loyalty e where ln w is the natural log of self-reported average monthly earnings at the workplace where the employee interview took place; loyalty (composite measure) is standardized by country to have zero mean and unit standard deviation; d represents the effect on (log) wage of one standard deviation increase in loyalty; X is a row vector of explanatory variables (age, age squared and years of schooling to approximate general experience; workplace tenure to approximate firm-specific experience; dummy variables equal to one for women, supervisory responsibilities, and married; dummy variables equal to one for state ownership and for different sectors education or health services, retail and other services, finance and so forth, with manufacturing as the omitted sector); b is a column vector of parameters and e is an error term. We use OLS regression analysis, clustering by firm to take into account possible collinearity among workers in a particular organization. In a second specification, we add characteristics to X that capture labor market conditions in transition economies that would likely influence earnings dummy variable equal one if worker holds multiple jobs at time of interview; dummy variable equal one if worker experienced unemployment in preceding five years[15]. 5.1 Empirical results: basic specification Results reported in Table V suggest that, among the participants in our survey, loyalty pays. The loyalty coefficient is positive in all countries, and statistically significant in four: Armenia, Azerbaijan, Kyrgyzstan and Serbia. Indeed, among Armenian, Kyrgyz and Azeri participants, the magnitude of the loyalty coefficient is greater than that associated with experience; among Serbian participants, experience has a relatively greater impact on earnings. We note that the earnings results are similar to those reported for developed market economies. Earnings increase with age, but by a decreasing amount, and are positively

Does worker loyalty pay?

29

EBHRM 1,1
Loyalty

Armenia

Kazakhstan Kyrgyzstan

Russia

Serbia

Azerbaijan

30

Table V. OLS regression results earnings, basic model

0.145*** 0.00832 0.0326** (0.0262) (0.0177) (0.0158) Job tenure 0.00901* 0.0131** 0.00218 0.0047 (0.00559) (0.00209) Age 0.0139 0.0430*** 0.0371*** (0.0143) (0.0126) (0.00931) Age squared/100 0.0133 0.0561*** 0.0404*** (0.0158) (0.0163) (0.0105) Years of schooling 0.0682*** 0.0810*** 0.0147** (0.0111) (0.0131) (0.00584) Respondents sex 0.0776 0.184*** 0.168*** (0.0524) (0.0610) (0.0584) Supervisory responsibilities 0.160*** 0.164*** 0.256*** (0.0478) (0.0498) (0.0436) Married 0.142** 0.0117 0.0169 (0.0625) (0.0503) (0.0575) Married woman 0.130 0.0259 0.00340 (0.0797) (0.0684) (0.0649) State-owned organization 0.00572 0.276*** 0.287** (0.142) (0.0952) (0.126) Health, education organization 0.658*** 0.00111 0.0394 (0.185) (0.126) (0.138) Service organization 0.0841 0.224** 0.0922 (0.153) (0.0922) (0.0910) Financial services organization 0.395** 0.295 0.578*** (0.181) (0.183) (0.157) Public organizations (federal, regional, local) 0.208 0.217* 0.0376 (0.222) (0.124) (0.117) Construction, transportation 0.0683 0.211* 0.278** (0.230) (0.113) (0.121) Constant 9.929*** 7.965*** 7.203*** (0.320) (0.258) (0.192) Observations 1,459 1,392 1,189 R2 0.237 0.238 0.208

0.0271 0.0270* 0.0587*** (0.0238) (0.0140) (0.0174) 0.00512 0.00207 0.0043 (0.00312) (0.00467) 0.0043 0.0320*** 0.00876 0.0471*** (0.0108) (0.0156) (0.0125) 0.0337** 0.0112 0.0544*** (0.0129) (0.0207) (0.0165) 0.0397*** 0.0623*** 0.0321*** (0.00864) (0.00981) (0.0064) 0.220*** 0.0202 0.235*** (0.0694) (0.0300) (0.0479) 0.322*** (0.0380) 0.0660 (0.0682) 0.0504 (0.0747) 0.0844 (0.135) 0.223 (0.146) 0.0996 (0.115) 0.540*** (0.0874) 0.299*** (0.0447) 0.0509 (0.0400) 0.0501 (0.0344) 0.0674 (0.0978) 0.310** (0.125) 0.0970 (0.102) 0.0522 (0.101) 0.3215*** (0.0454) 0.0367 (0.0385) 0.0679 (0.0569) 0.235** (0.1037) 0.2623*** (0.1009) 0.0584 (0.0551) 0.5771*** (0.1663)

0.142 (0.185) 0.366** (0.148) 7.189*** (0.236) 1,756 0.283

0.109 (0.151) 0.272** (0.110) 9.796*** (0.313) 1,420 0.342

0.481*** (0.1591) 0.0477 (0.0931) 4.313*** (0.2355) 1,092 0.529

Notes: Standard errors in parentheses. ***po0.01; **po0.05; *po0.1

correlated with education. Women tend to earn less than men; supervisors tend to earn more. Marital status is largely insignificant[16]. Participating employees in state-owned firms earn less than their counterparts in privately owned firms. The negative coefficients on education/health care, and public organizations (local, regional and federal government organizations, plus NGOs) reflect the low wages paid in these sectors in comparison to manufacturing. This stems largely from the fact that, in these six

countries, these two sectors typically involve state-owned organizations and pink-collar (dominated by women) occupations. In contrast, wages in the financial services sector are significantly higher than in manufacturing in five of the six countries; these jobs typically are found in the private sector and held by men. Recognizing the possible endogeneity between loyalty and earnings, we repeat the regression analysis using notchgjob, standardized to have a zero mean and unit standard deviation, as our loyalty measure. While we lose the richness of the composite measure, this single-item measure provides a reasonable alternative assessment of the link between loyalty and earnings. Controlling for the same worker and workplace characteristics, we find that the coefficient on notchgjob is positive in four of the six countries, and statistically significant in Armenia and Azerbaijan. 5.2 Empirical results: extended specification The extended specification reported in Table VI includes holds multiple jobs and experience with unemployment. These factors tend to reduce wages in all but Kyrgyzstan, with the results statistically significant in Russia and Serbia (multiple jobs) and Armenia, Kazakhstan and Russia (experience with unemployment). Loyalty continues to exhibit a positive and significant association with earnings in Armenia, Kyrgyzstan and Azerbaijan, and in this specification, in Kazakhstan, as well. Among Russian participants, loyalty has a marginally negative association with earnings. We note that the same basic pattern of coefficient sign and significance seen in Table V holds for the worker and workplace controls in the extended specification. When notchgjob is used as the loyalty measure, as in the basic specification, the coefficient is once again positive in four countries, and statistically significant among participants in Armenia and Azerbaijan. 6. Discussion and conclusions Is loyalty a financially rewarding investment of a workers time and effort? We use data collected from a large number of employees across a wide variety of workplaces in six formerly socialist economies to address this question. Our findings indicate a positive link between worker loyalty and earnings, in some cases equivalent to the return associated with an additional year of education. In essence, the firms participating in this study appear to be sharing the wealth associated with worker loyalty. By documenting the earnings benefits to workers, our study extends the existing literature, which focusses primarily on loyalty benefits to firms, and provides preliminary evidence that worker loyalty is not misguided, as some studies suggest. 6.1 Incidence of worker loyalty Using a composite measure that captures multiple loyalty dimensions, our data indicate that over 75 percent of the workers exhibited moderately strong or strong loyalty; although among Azeri workers the figure is somewhat o60 percent. These results largely coincide with reports provided by consulting firms in developed market economies suggesting that 10-30 percent of workers are not engaged. More importantly, however, among the participants in this study, workers who self-report performing better than their peers are more loyal than workers who self-report performing worse. Thus our results tend to underscore the importance of firms promoting worker loyalty and undertaking strategies for removing workers who exhibit low loyalty. How can firms increase the likelihood that their workers will become or stay loyal? Our results highlight a plethora of strategies firms might employ.

Does worker loyalty pay?

31

EBHRM 1,1
Loyalty Job tenure

Armenia 0.142*** (0.0271) 0.0527 (0.0610) 0.124** (0.0494)

Kazakhstan Kyrgyzstan 0.00388 (0.0191) 0.00811 (0.0723) 0.232*** (0.0383) 0.0329** (0.0158) 0.0588 (0.0598) 0.0340 (0.0422)

Russia 0.0289 (0.0232) 0.0916* (0.0531) 0.0657 (0.0517)

Serbia 0.00336 (0.0166) 0.394 (0.546) 0.0174 (0.0328)

Azerbaijan 0.0583*** (0.0182) 0.0041 (0.0044) 0.0537 (0.0463)

32

Multiple jobs Experience w/ unemployment Age Age-squared/100 Years of schooling Respondents sex Supervisory responsibilities Married Married woman State-owned organization Health, education organization

0.0116** 0.00256 0.00185 0.00572* 0.00117 0.0153 (0.00468) (0.00519) (0.00209) (0.00300) (0.00579) (0.0317) 0.00891 0.0271* 0.0367*** 0.0329*** 0.00446 0.0478*** (0.0146) (0.0158) (0.00920) (0.0105) (0.0217) (0.0129) 0.00709 0.0286 0.0396*** 0.0350*** 0.0108 0.0561*** (0.0163) (0.0195) (0.0104) (0.0125) (0.0284) (0.0172) 0.0665*** 0.0598*** 0.0145** 0.0412*** 0.0646*** 0.0342*** (0.0115) (0.0106) (0.00593) (0.00841) (0.0117) (0.0064) 0.0890* 0.171** 0.170*** 0.241*** 0.0107 0.252*** (0.0516) (0.0732) (0.0576) (0.0690) (0.0403) (0.0489) 0.157*** (0.0473) 0.129** (0.0599) 0.113 (0.0789) 0.00885 (0.136) 0.159*** (0.0497) 0.0201 (0.0696) 0.0425 (0.0896) 0.348** (0.135) 0.171 (0.170) 0.323*** (0.0830) 0.269* (0.156) 0.375** (0.150) 0.244*** (0.0686) 8.508*** (0.328) 760 0.282 0.254*** (0.0434) 0.0144 (0.0551) 0.00632 (0.0633) 0.287** (0.128) 0.0242 (0.144) 0.0777 (0.0968) 0.570*** (0.158) 0.0276 (0.120) 0.254** (0.126) 7.197*** (0.186) 1,186 0.210 0.319*** (0.0381) 0.0421 (0.0673) 0.0353 (0.0751) 0.0880 (0.132) 0.224 (0.143) 0.0949 (0.111) 0.517*** (0.0851) 0.153 (0.182) 0.338** (0.144) 7.222*** (0.235) 1,715 0.294 0.355*** (0.0425) 0.0227 (0.0323) 0.0337 (0.0438) 0.176** (0.0844) 0.475*** (0.0893) 0.223* (0.110) 0.0564 (0.0818) 0.0896 (0.0983) 0.241** (0.0882) 10.04*** (0.431) 923 0.567 0.316*** (0.0457) 0.0373 (0.0407) 0.0687 (0.0591) 0.2258** (0.1084) 0.264** (0.1035) 0.0490 (0.0506) 0.567*** (0.1643) 0.484*** (0.1663) 0.0505 (0.0937) 4.304*** (0.2406) 1,056 0.532

Table VI. OLS regression results earnings, extended model Notes: Standard errors in parentheses. ***po0.01; **po0.05; *po0.1

0.638*** (0.180) Service organization 0.0693 (0.150) Financial services organization 0.425** (0.173) Public organizations (federal, regional, local) 0.191 (0.216) Construction, transportation 0.119 (0.235) Constant 10.11*** (0.326) Observations 1,444 R2 0.237

6.2 Loyalty and expected rewards Like studies conducted in developed market economies, we find a positive link between loyalty and expected rewards, with participating workers more likely to expect intrinsic rewards than extrinsic rewards. Our findings are consistent across six culturally and economically diverse countries. While our country samples are not

nationally representative, this commonality across workers in these six countries suggests a rather broad foundation for developing a global perspective of strategies that influence worker performance. Our findings provide important implications for managers and human resource development personnel. First, participating workers generally had very low expectations of receiving desired rewards. A large literature suggests that expectations of receiving desired rewards play an important role in worker motivation, job satisfaction and performance. Combined with our results that indicate a similar link between expected rewards and worker loyalty, it is clear that a strategic opportunity to enhance worker loyalty, and thus performance, hinges on providing rewards that workers desire. We note that desired rewards in transition economies may not always coincide with rewards desired in western countries. Second, the positive and significant link between expected bonus and worker loyalty was the most consistent finding in our study, indicating that among many of the participating workplaces, policies are already in place to reward performance. Publicly recognizing loyal workers (those who do their job well and consistently adhere to or promote the companys objectives), perhaps by using workplace bulletin boards or newsletters, or at monthly or annual workplace gatherings, for example, might also help to establish a workplace culture that engages more workers. Our findings suggest it would likely be worthwhile for firms to educate their workers about the benefits of loyalty. In lieu of paying bonuses, organizational strategies to build worker loyalty might focus on options suggested by our intrinsic reward findings. For example, more freedom on the job and chance to accomplish something worthwhile were both positively and significantly related to loyalty, yet both were viewed as highly unlikely rewards to receive. Training managers to allow worker autonomy, helping managers to train workers for a wider variety of tasks, engaging workers in joint decision making and better educating them about their firms mission and goals might be used to target this apparently untapped opportunity to enhance worker loyalty. Moreover, given the positive link between loyalty and chance to develop new skills, providing opportunities for job enrichment that is, redesigning job dimensions to provide training in a new area or assigning more challenging work (Herzberg, 1968; Insightlink, 2004) represents another area to explore. Niehoff et al. (2001) found that job enrichment resulted in higher levels of worker loyalty. These strategies, however, are contingent upon creating a workplace culture where workers feel rewarded when they gain more autonomy or control, or when their job has been enriched; a workplace culture quite different from the paternalistic and directive management system of the Soviet-type firm. While job security, praise from supervisor, friendly co-workers and job makes me feel good about myself are important correlates of worker loyalty in developed market economies, they were not statistically significant among the workers participating in our study. This underscores the difference in workplace cultures between the organizations participating in our study and organizations included in studies conducted in developed market economies. For example, benefits to the firm associated with praise from supervisor, in the form of verbal recognition, a hand-written note, or a day off, are substantial in developed market economies (Insightlink, 2004; DAusilio, 2008; Duboff and Heaton, 1999; Farinelli, 1992). Yet numerous studies conducted in transition economies find supervisor praise to be less desired and least expected (Huddleston et al., 2002; Linz, 2003; Linz and Semykina, 2011). Moreover, while friendliness of co-workers sounds rather pedestrian, when viewed in the context of the workplace, being a good team member and helping others demonstrates

Does worker loyalty pay?

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positive organizational citizenship behaviors and helps to create an environment where individuals feel valued (Bolino and Turnley, 2003; Podsakoff et al., 2000). To take advantage of these relatively low cost options for enhancing worker loyalty, our results suggest that replacing the Soviet-type workplace environment (they pretend to pay us and we pretend to work) with a new workplace culture may be required; one where workers feel engaged and loyalty is publicly recognized. 6.3 Limitations and future research While our findings indicate that worker loyalty is positively linked to earnings, our analysis is limited by our cross-sectional data, which preclude efforts to establish causality. Future research on worker loyalty will be greatly enhanced if longitudinal data are collected. Second, because our country samples are not nationally representative, we are limited in our ability to generalize our results. Collecting the appropriate nationally representative data is essential for facilitating future research. Moreover, because we use self-reported data on education, workplace tenure, earnings and performance, our results likely are subject to biases due to measurement error. Future studies which collect data from supervisors would reduce same-source bias. Future studies might also extend our analysis by considering links between loyalty and personality, for example, or by collecting similar data from employees in developed market economies in order to make more explicit comparisons.
Notes 1. The popular press, numerous organizations involved in measuring worker loyalty (e.g. Walker Information Loyalty Reports, The Loyalty Research Center, surveys conducted by MASMI and Global Poll), recent blogs (e.g. www.linkedin.com/answers/management/ labor-relations/MGM_LBR/790674-43107269) and trade publications routinely carry stories reporting that loyalty is rising (falling) and what companies are doing (have done) to improve worker loyalty, as well as stories which estimate the replacement cost of labor in terms of profit share or share of workers annual salary. 2. Walker Information Inc (2007) loyalty report indicates that least loyal are employees with workplace tenure of less than one year; loyalty increases with workplace tenure for the first ten years at the organization; and loyalty diminishes with workplace tenure during the second decade at the organization. 3. Country selection was driven by the presence of established contacts who agreed to act as local project coordinators. According to US State Department reports, these countries reflect different levels of economic development, as measured by per capita GDP and share of agriculture in GDP. In 2007 (before the recent financial crisis) per capita GDP was $620 in Kyrgyzstan, $2,570 in Armenia, $2,710 in Azerbaijan, $4,450 in Serbia, $4,970 in Kazakhstan and $7,590 in Russia. In terms of share of agriculture in GDP, in Kyrgyzstan, in 2007, agriculture accounted for 31 percent of GDP, in Armenia 20 percent, in Serbia 13 percent, in Azerbaijan 7 percent, in Kazakhstan 6 percent and in Russia 4 percent. In terms of cultural diversity, as measured by ethnic composition of population and religions, Armenia and Azerbaijan are the most homogenous (98 percent population report themselves as ethnic Armenians; 93 percent belong to Armenian Apostolic Church; in Azerbaijan, 91 percent population are Azeri, with 93 percent reporting themselves as Muslims). In Kazakhstan, 56 percent report themselves as ethnic Kazakh (Sunni Muslims account for nearly half of the population; 44 percent practice Eastern Orthodoxy), compared to just under 70 percent of population in Kyrgyzstan reporting themselves as ethnic Kyrgyz (with 75 percent reporting themselves as Muslims and 20 percent practicing Eastern Orthodoxy). In Serbia, 83 percent of the population are ethnic Serbs (84 percent practice Eastern Orthodoxy, 6 percent report themselves as Roman Catholic, 3 percent as Muslim). Similarly, in Russia, just over

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80 percent of population are ethnic Russian (about 60 percent practice Eastern Orthodoxy; 16 percent report themselves as non-believers) (see www.state.gov/p/eur/ci/index.htm). 4. While ten to 11 years of schooling in these countries is the equivalent of high school, after eight or nine years students may elect to pursue vocational training rather than general education. Only 6 percent of the participants completed less than high school. Over 90 percent had training beyond high school. 5. The relative gender imbalance stems in part from local culture (willingness of males to respond to query of female survey administrator, and vice versa) and in part from connections of local project coordinators (connections dominated by workplaces that tend to employ a relatively large fraction of females education/health care, government offices, retail). 6. This includes open and closed joint stock companies, limited liability corporations, partnerships and sole proprietorships. 7. The Cronbach a scores for this measure range from 0.55 (Kazakhstan, Kyrgyzstan) to 0.85 (Azerbaijan), with Russia, Armenia and Serbia at approximately 0.75. 8. Our reward list was originally used by Huddleston and Good (1999) in a study of Russian and Polish retail workers. These 11 rewards emerged from a larger set of rewards through focus groups and empirical study. Following their lead, participants in our study were given a five-point Likert scale, where 1 not very likely and 5 very likely. 9. We note that the majority of Kyrgyz participants are employed in state-owned organizations, particularly in the public sector. Studies suggest that individuals sort into state-sector jobs to enjoy particular (non-competitive) work environments (Halepota and Irani, 2010; Kim, 2005, 2009; Turkyilmaz et al., 2011). We control for state sector employment in our regression analysis. 10. Serbia may be viewed as exception to this participating workers put additional pay as one of the more likely rewards they expect. However, among participating Serbs, expectation of receiving this or any reward is significantly lower than among participants in other countries. 11. Participants were given the following wording: for the following items, compare yourself to other employees at your organization who do work similar to yours. How do you rate yourself in terms of quantity and quality of performance? Check the appropriate response (where 1 much worse than others, 5 much better than others). The specific statements are as follows: compared to other employees doing similar work, the overall quality and quantity of my work is y. Compared to other employees doing similar work, how productive are you? Compared to other employees doing similar work, how well do you anticipate problems that may arise and try to prevent them or minimize their effect? The Cronbach a scores for the performance composite measure range from approximately 0.45 (Serbia) to 0.85 (Armenia) with Russia, Kazakhstan and Kyrgyzstan at 0.80 and Azerbaijan at 0.70. 12. Due to high collinearity between the expected rewards chance to develop skills and chance to learn new things among the participants in this project, we dropped chance to learn from our regression analysis. 13. The relationships between expected rewards and tenure have little in common with those reported in Table III. For example, expected rewards have little explanatory value in terms of worker seniority in Kyrgyzstan and Russia. While expected rewards tend to exhibit a negative association with workplace tenure, exceptions (positive associations) occur most often among participating Armenian and Kazakh workers. 14. When statistically significant, tenure is negatively related to years of education. In all six countries, participating workers in state-owned organizations report longer workplace tenure/higher loyalty. Workplace tenure tends to be longest in manufacturing; negative

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coefficients appear for nearly all non-manufacturing sectors, the exception being service sector workers in Kazakhstan. Not surprisingly, however, older workers tend to report longer workplace tenure, as do workers with supervisory responsibilities. 15. Because the sample size changes in each country as a result of missing values associated with the two new variables, for this extended specification, we standardized the loyalty measure for each country based on the actual sample size.

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16. As seen in Table V, among Kyrgyz participants, overall, single men are most loyal and married men least loyal, with married women more loyal than single women. However, the magnitude of the difference among these gender/marital status categories is quite small.

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Further reading Abraham, K.G. and Farber, H.S. (1987), Job duration, seniority, and earnings, American Economic Review, Vol. 77 No. 3, pp. 278-297. Ali, A., Azim, A. and Falcone, T. (1993), Work loyalty and individualism in the United States and Canada, International Journal of Manpower, Vol. 16 No. 6, pp. 58-66. Altonji, J.G. and Shakotko, R.A. (1987), Do wages rise with job seniority?, Review of Economic Studies, Vol. 54 No. 3, pp. 437-459. Chen, Z. (2001), Further investigation of the outcomes of loyalty to supervisor: job satisfaction and intention to stay, Journal of Managerial Psychology, Vol. 16 No. 8, pp. 650-660. Crabtree, S. (2004), Getting personal in the workplace, GALLUP Business Journal, June, available at: http://businessjournal.gallup.com/content/11956/getting-personalworkplace.aspx (accessed August 18, 2011). DeCuyper, N. and DeWitte, H. (2006), The impact of job insecurity and contract type on attitudes, well-being and behavioural reports: a psychological contract perspective, Journal of Occupational and Organizational Psychology, Vol. 79 No. 3, pp. 395-409. Denisova, I., Eller, M. and Zhuravskaya, E. (2007), Labor market flows in transition, CEFIR Policy Paper No. 29, Moscow, July. Duska, R. (2000), Whistleblowing and employee loyalty, in DesJardins, J.R. and McCall, J.J. (Eds), Contemporary Issues in Business, 4th ed., Wadsworth, Belmont, CA, pp. 167-172. Eskildsen, J.K. and Nussler, M.L. (2000), The managerial drivers of employee satisfaction and loyalty, Total Quality Management, Vol. 11 Nos 4-6, pp. s581-s588. Frey, B. (1997), Not Just for the Money: An Economic Theory of Personal Motivation, Edward Elgar Publishing, Cheltenham. Hackman, J.R. and Oldham, G.R. (1976), Motivation through the design of work: test of the theory, Organizational Behavior and Human Performance, Vol. 16 No. 2, pp. 250-279. Hofstede, G. (1980), Cultures Consequences: International Differences in Work-Related Values, Sage Publications, Beverly Hills, CA. Linz, S.J. and Semykina, A. (2008), How do workers fare during transition? Perceptions of job insecurity among Russian workers, 1995-2004, Labour Economics, Vol. 15 No. 3, pp. 475-491. MASMI (2010), MASMI survey reveals challenges to employee engagement, July 12, available at: www.masmi.com/global/main.php Mincer, J. and Jovanovic, B. (1981), Labor mobility and wages, in Rosen, S. (Ed.), Studies in Labor Markets, National Bureau of Economic Research, University of Chicago Press, New York, NY, pp. 21-64. Mottaz, C.J. (1985), The relative importance of intrinsic and extrinsic rewards as determinants of work satisfaction, Sociological Quarterly, Vol. 26 No. 3, pp. 365-385. Nikolaou, I. and Tsaousis, I. (2002), Emotional intelligence in the workplace: exploring its effects on occupational stress and organizational commitment, International Journal of Organizational Analysis, Vol. 10 No. 4, pp. 327-342. Sansone, C. and Harackiewicz, J. (Eds) (2000), Intrinsic and Extrinsic Motivation: The Search for Optimal Motivation and Performance, Academic Press, San Diego, CA. Society for Human Resource Management (2010), Motivation in todays workplace: the link to performance, SHRM Research Quarterly, Quarter 2, pp. 1-9, available at: www.shrm.org/ research/articles/articles/documents/10-0235 research quarterly-q2.fnl.pdf (accessed August 8, 2011).

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Sverke, M. and Goslinga, S. (2003), The consequences of job insecurity for employers and unions: exit, voice and loyalty, Economic and Industrial Democracy, Vol. 24 No. 2, pp. 241-270. Taras, V., Kirkman, B. and Steel, P. (2010), Examining the impact of cultures consequences: a three-decade, multi-level meta-analytic review of Hofstedes cultural value dimension, Journal of Applied Psychology, Vol. 95 No. 3, pp. 405-439. Topel, R.H. (1991), Specific capital mobility and wages: wages rise with job seniority, Journal of Political Economy, Vol. 99 No. 1, pp. 145-176. Winiecki, J. (2008), Employment and unemployment in transition: the legacy of the communist past, Post-Communist Economies, Vol. 20 No. 3, pp. 377-390. Corresponding author Susan Linz can be contacted at: linz@msu.edu

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