When Candor Hurts the Business: The Economics of Employee Retaliation

Gossiping. Working slower. Talking back. Damaging company products. These are some ways upset employees act out against their employers.

Is it worth it, then, for the boss to potentially stir such retaliation with a poor performance review? What about when a tough evaluation reduces pay? In an era of forums like Glassdoor, where workers rate companies, many managers cut their losses: They give most employees average evaluations, and are often reluctant to call out underperformers.

This isn’t a management failure. In fact, supervisors who inflate the reviews of lackluster employees do so because they anticipate pushback, so they make the conscious (or subconscious) decision to avoid the drama—and associated costs.

“How costly is retaliation for your firm?” asks Harvard Business School Assistant Professor Henrique Castro-Pires. “If you think you're going to keep the same employees for a long time, having a healthy team is very important, and having a dysfunctional environment might be very costly.”

In “Management, Performance Reviews, and Retaliation,” which appeared in the February issue of Management Science, Castro-Pires’ theoretical model examines the price of employee resistance, from quiet quitting to outright sabotage. At a time when talent websites amplify discontent, the research highlights the delicate trade-offs managers face between honest evaluations and workplace harmony.

His research suggests that managers should provide strong incentives for exceptional performance, but they might be better off overlooking minor slipups. The cost of retaliation often outweighs the gains of stricter enforcement.

“Our results suggest that a firm might be better off by not punishing poor performances even if it would be feasible to do so,” the article says.

Sabotage strikes a chocolate factory

Castro-Pires decided to study workplace retaliation after a friend who runs a candy factory in Brazil shared a stomach-turning story. Angry about a performance review that reduced a worker’s pay, the person dumped ethanol into a tank of melted chocolate to lash out.

Castro-Pires’ friend, charged with tasting the chocolate each day, noticed something was off, and had to toss a day’s worth of product. “It was a massive cost,” Castro-Pires says.

It’s difficult to measure retaliation because most employees don’t cop to it and most workplaces don’t admit it’s happening, he says. In the chocolate incident, company officials reviewed surveillance footage and fired the employee, but most behavior is subtler.

“There are a lot of small things you can change in your daily work that would make the life of your boss, or your firm in general, a little bit harder,” Castro-Pires says.

His article documents examples of workplace resistance: A 2022 paper examining a US call center found that workers retaliated against a pay cut by issuing high customer refunds, with refunds increasing by 5.8 percentage points and reducing net sales by about $11 an hour. A 1972 book called Working describes a disgruntled steel worker refusing to say “yes, sir” to his boss and occasionally “putting a dent in [the steel].”

Why reviews fall short

A boss can’t see everything an employee does, creating what ethicists call a moral hazard, or an easily exploitable dynamic. Many firms use rewards, such as raises or bonuses, to encourage workers to meet goals, such as sales targets or hours clocked, and some cut pay when performance falls short.

However, when output is difficult to measure, many companies rely on verbal or written performance reviews, which can be prone to bias or unfairness, he says. Critics fault reviews for “leniency,” or inflating weak employees’ ratings for inferior work, and “centrality,” or failing to reflect actual variations in employee performance.

Basically, they’re often not that informative. “They don't reveal a fine level of difference in performance,” says Castro-Pires. “But that might be optimal, even from the perspective of the firm itself.”

How much retaliation can bosses tolerate?

Castro-Pires designed a theoretical model to show that those “flaws”—leniency and centrality—are actually features. Those tendencies imply managers know that tough criticism may result in retaliation, so they decide it’s in the firm’s interest to avoid giving poor reviews.

His model shows that employees retaliate when their pay is lower than they expected, but before the manager shares a negative performance review with the company. At that point, adding negative feedback to the punishment might only worsen a worker’s reaction.

“The central insight is that the principal faces a trade-off: either using more [negative] information [about the employee] and punishing poor performances but enduring retaliation losses or providing incentives only after good performance realizations but wasting information,” the research explains.

Castro-Pires says managers can take two approaches:

Use sticks and carrots. Tying pay to performance—rewarding with bonuses and penalizing with pay cuts—helps companies measure effort more precisely, but managers should expect some retaliation when they punish employees. This approach works best for short-term assignments, he says.

Use only carrots. Managers can reward strong performance while overlooking weaker performance, knowing retaliation may occur. However, removing the threat of pay cuts can lead some workers to put in less effort, so companies might overpay for mediocre work, Castro-Pires says. Poor performance becomes difficult to distinguish from average work, so “you're paying a little bit more for the same performance,” he says.

Restoring harmony at work

Castro-Pires offers practical considerations to help managers, corporate HR departments, and employees balance honest feedback with minimizing retaliation.

For managers:

• Let small issues slide. “If your perception of the performance of a worker is below what you would expect to be an average performance, but just by a little bit, you might prefer not to report that to avoid those retaliation costs.”

• Decouple pay from negative feedback. “[In a performance review], if you can actually generate this feeling of ‘no, this is not directly hitting your compensation. What I’m trying to do here is help you improve,’ I wouldn't see a reason [for an employee] to retaliate.”

• Clarify the reasons for a poor review. “A lot of retaliation comes from this sense of unfairness,” he says. “It’s important to tell employees what criteria they’re being evaluated on, which helps the worker understand where this is coming from and prevents a little bit of the retaliation.”

For HR departments:

• Lean into carrots and use sticks sparingly. “Avoid punishing by reducing payment if performance is below a [certain] level to avoid triggering retaliation,” he says. Instead, focus on incentives, such as bonuses for strong performance.

• Survey both managers and employees to detect retaliation. “It’s useful to ask, anonymized, whether you have seen retaliation in the firm. Have you experienced it, or are you concerned about it?”

For employees:

• Communicate, rather than retaliate. When an employee is unhappy with a review or pay cut, honest communication is a path toward resolving the issue, he says.

• Consider moving on. If communicating gets employees nowhere, and they feel unfairly evaluated, it might be time for a new role. “Is this the type of firm that I want to stay in, or is this not a good match? Consider finding a culture and workplace environment that fits more with what you believe.”

Image credit: Ariana Cohen-Halberstam with assets from Adobe Stock.