More productive companies pay more

A recent paper from the US studied the relationship between productivity, management, and worker’s pay based on confidential employer-employee data from the US Census. The authors found that employees at more productive companies (higher revenue per worker) have substantially higher mean pay and higher pay across all pay levels. This was true for all levels of pay, from senior executives to entry level employees. However, the distribution was uneven. The pay-performance relationship was stronger for the highest paid employees, with a doubling in productivity associated with 11% higher pay for the highest-paid employee (typically the CEO) compared to 4.7% for the median worker.

Pay increases were higher in publicly-listed companies than in unlisted private companies. The highest paid employee in a publicly listed company saw a higher increase in pay (16.4%) than the highest paid employee in a private company (9.4%) for a doubling in productivity.

The study also found that management style impacted pay, where companies with more structured management practices tended to pay more and have larger pay inequality between top earners and the median worker.

Top earners at more productive companies with structured management practices were more likely to also have higher within-year pay volatility.

The study is descriptive. Correlations do not suggest causation. Nevertheless, it does appear to contradict the view some have that the way to wring more profit out of a company is to minimise pay.

The study can be found HERE.

© Guerdon Associates 2024
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