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

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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, University Library of Munich, Germany, 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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    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. Seppo Honkapohja & Frank Westermann, 2009. "Pay-setting Systems in Europe: Ongoing Developments and Possible Reforms," Palgrave Macmillan Books, in: Seppo Honkapohja & Frank Westermann (ed.), Designing the European Model, chapter 3, pages 82-121, Palgrave Macmillan.
    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.
    5. Bruce Rayton, 1997. "Rent-sharing or incentives? Estimating the residual claim of average employees," Applied Economics Letters, Taylor & Francis Journals, vol. 4(12), pages 725-728.
    6. Chui Ying Lee & Samuel Lotsu & Moinul Islam & Yuichiro Yoshida & Shinji Kaneko, 2019. "The Impact of an Energy Efficiency Improvement Policy on the Economic Performance of Electricity-Intensive Firms in Ghana," Energies, MDPI, vol. 12(19), pages 1-21, September.
    7. Paresh Kumar Narayan & Dinh Hoang Bach Phan, 2023. "Do Financial Technology Firms Influence Labour Force Outcomes In Indonesian Banks?," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 26(4), pages 587-606, November.

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    More about this item

    Keywords

    incentives; agency costs; profit-sharing; pay-performance sensitivities; firm performance;
    All these keywords.

    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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