Firm Performance and Compensation Structure: Performance Elasticities of Average Employee Compensation
AbstractAgency costs are a cost of production, and firms that do a better job of minimizing these costs should exhibit better performance. This paper tests this hypothesis by calculating the performance elasticity of average employee hourly compensation for U.S. manufacturing firms. This elasticity indicates the degree of alignment between employee and shareholder objectives. The estimated elasticity is indistinguishable from zero in low performance firms, and it equals 0.193 in high performance firms. While it is difficult to know whether an elevated performance sensitivity causes better firm performance, clearly the best performers in manufacturing industries link average employee pay to performance.
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Bibliographic InfoPaper provided by EconWPA in its series Labor and Demography with number 9607001.
Length: 37 pages
Date of creation: 10 Jul 1996
Date of revision: 15 Apr 1998
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incentives; agency costs; profit-sharing; pay-performance sensitivities; firm performance;
Other versions of this item:
- Rayton, Bruce A., 2003. "Firm performance and compensation structure: performance elasticities of average employee compensation," Journal of Corporate Finance, Elsevier, vol. 9(3), pages 333-352, June.
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
- G3 - Financial Economics - - Corporate Finance and Governance
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