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Firm Performance and Compensation Structure: Performance Elasticities of Average Employee Compensation

Author

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  • Bruce A. Rayton

    (University of Bath Management School)

Abstract

Agency 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.

Suggested Citation

  • Bruce A. Rayton, 1996. "Firm Performance and Compensation Structure: Performance Elasticities of Average Employee Compensation," Labor and Demography 9607001, EconWPA, revised 15 Apr 1998.
  • Handle: RePEc:wpa:wuwpla:9607001 Note: Type of Document - MS-Word 7.0 for Windows 95; prepared on IBM PC - Windows 95; pages: 37 ; figures: included. Send me e-mail if there are any problems. I can attatch a copy of the file to my response, or I can arrange another form of delivery.
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    References listed on IDEAS

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    1. Abowd, John M, 1989. "The Effect of Wage Bargains on the Stock Market Value of the Firm," American Economic Review, American Economic Association, vol. 79(4), pages 774-800, September.
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    3. Smith, Clifford Jr. & Watts, Ross L., 1992. "The investment opportunity set and corporate financing, dividend, and compensation policies," Journal of Financial Economics, Elsevier, vol. 32(3), pages 263-292, December.
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    5. Ichniowski, Casey & Shaw, Kathryn & Prennushi, Giovanna, 1997. "The Effects of Human Resource Management Practices on Productivity: A Study of Steel Finishing Lines," American Economic Review, American Economic Association, vol. 87(3), pages 291-313, June.
    6. Bruce A. Rayton & Jonathan S. Seaton, 1999. "The size of employee stakeholding in large UK corporations," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 20(5), pages 259-266.
    7. Bhargava, Sandeep, 1994. "Profit-Sharing and the Financial Performance of Companies: Evidence from U.K. Panel Data," Economic Journal, Royal Economic Society, vol. 104(426), pages 1044-1056, September.
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    Cited by:

    1. Christine Marsal, 2006. "La cohérence dans la mobilisation du capital humain:une illustration de la théorie de l’architecture organisationnelle dans les banques de réseau," Working Papers CREGO 1060501, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.
    2. Vicente Cuñat & Maria Guadalupe, 2005. "How Does Product Market Competition Shape Incentive Contracts?," Journal of the European Economic Association, MIT Press, vol. 3(5), pages 1058-1082, September.
    3. Lars Calmfors & Giancarlo Corsetti & Seppo Honkapohja & John Kay & Willi Leibfritz & Gilles Saint-Paul & Hans-Werner Sinn & Xavier Vives, 2004. "Pay-setting Systems in Europe: On-going Development and Possible Reforms," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 61-83, October.
    4. Amit Saini & Kelly Martin, 2009. "Strategic Risk-Taking Propensity: The Role of Ethical Climate and Marketing Output Control," Journal of Business Ethics, Springer, vol. 90(4), pages 593-606, December.

    More about this item

    Keywords

    incentives; agency costs; profit-sharing; pay-performance sensitivities; firm performance;

    JEL classification:

    • 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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