Should Employees Be Given Second Chances? Evidence from A Quasi-Field Experiment

Many companies give employees who have made mistakes or performed poorly in the past probationary periods to improve performance. However, the performance effects of second-chance provision have received little research attention. We predict that penalty contracts that offer second chances will lead to higher employee performance relative to penalty contracts that do not offer second chances. The underlying theory of our hypothesis is that the provision of second chances helps mitigate the negative impact of penalty contracts on employees’ perceived fairness and managerial trust. We conduct a quasi-experiment at two facilities of a manufacturing company for six months. Employees at one location received penalty contracts without second chances while employees at the other location received penalty contracts with second chances. We find evidence consistent with our hypothesis. Supplemental analyses also provide support for the underlying theory of our hypothesis. Results of our study help explain why firms often give employees second chances before penalizing them or firing them.