Research: Better-Managed Companies Pay Employees More Equally

Executive Summary

Companies that implement more structured management practices pay their employees more equally. That finding comes from new research that was presented at the American Economic Association meeting in January. The research is preliminary and ongoing, but the finding is striking and seemingly robust — and it surprised the researchers. There’s a public perception that aggressive U.S. executives — from Mitt Romney to Jack Welch to the fictional 30 Rock character Jack Donaghy — allocate profits mostly to the top earners at their companies. The researchers hypothesized that more structured management would lead to rewarding high-performers over others, therefore leading to a rise in inequality inside of the firm. The reality is exactly the reverse, and that remains true even after controlling for employment, capital usage, firm age, industry, state, and how educated the employees are. What’s going on here? The researchers can’t answer that yet, but they have a few hypotheses. Companies with more-structured management practices might be more profitable and may share those profits with workers. Or, workers may be more productive at these companies and therefore be paid better. Or, these companies could rely more on outsourcing and therefore employ fewer types of workers which could mean narrower pay ranges.

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Companies that implement more structured management practices pay their employees more equally. That finding comes from new research that we presented at the American Economic Association meeting in January. Our research is preliminary and ongoing, but the finding is striking and seemingly robust. To be honest, it surprised us.

For 2010 and 2015, the U.S. Census Bureau fielded the Management and Organizational Practices Survey (MOPS) in partnership with a research team of subject matter experts, including one of us (Nick), as well as Erik Brynjolfsson and John Van Reenen. The MOPS collects information on the use of management practices related to monitoring (collecting and analyzing data on how the business is performing), targets (setting tough, but achievable, short- and long-term goals), and incentives (rewarding high performers while training, reassigning, or dismissing low performers) at a representative sample of approximately 50,000 U.S. manufacturing plants per survey wave. We refer to practices that are more explicit, formal, frequent, or specific as “more structured practices.” From the MOPS and related data, researchers have demonstrated just how important the use of these structured management practices is for companies and even entire economies, since firms that implement more of these practices tend to perform better.  We wanted to know what effect these management practices have on workers.

We found that companies that reported more structured management practices according to the MOPS paid their employees more equally, as measured by the difference between pay for workers at the 90th (top) and 10th (bottom) percentiles within each firm.

If anything, we expected the opposite. There’s a public perception that aggressive U.S. executives – from Mitt Romney to Jack Welch to the fictional 30 Rock character Jack Donaghy – allocate profits mostly to the top earners at their companies. We hypothesized that more structured management would lead to rewarding high-performers over others, therefore leading to a rise in inequality inside of the firm. As the chart above shows, the reality is exactly the reverse – and that remains true even after controlling for employment, capital usage, firm age, industry, state, and how educated the employees are.

As noted above, the management practices measured by the MOPS can be broadly grouped into three categories: monitoring, targets, or incentives. Our research finds that the negative correlation between structured management and inequality is driven by a strong negative correlation between the use of structured monitoring practices and inequality. By contrast, higher usage of structured incentives practices was positively correlated with inequality, albeit weakly. In other words, our finding seems to suggest that companies that collect and analyze specific and high-frequency data about their businesses tend to have a smaller gap between the earnings of workers at the top of the income distribution and the earnings of workers at the bottom of the distribution.

What’s going on here? Our research can’t answer that yet, but we have a few hypotheses.

Previous research shows that firms with more structured management practices are more profitable on average, and there’s long been evidence that when companies make extra profits they share some of them with workers. Perhaps companies with more structured practices allocate these profits such that less well-paid workers get more of the pie.

The relationship could also result from increased efficiency. Maybe firms with more structured practices have more efficient low-paid workers, as a response to training or monitoring practices, and their pay reflects that extra efficiency.

Finally, it could be that firms with more structured practices are more focused on specific tasks and rely more on outsourcing. More and more companies are outsourcing tasks like cleaning, catering, security, and transport. If outsourcing is more common for firms that use more structured practices, workers performing tasks outside of the companies’ core tasks would no longer be on those companies’ direct payrolls. If the jobs that are outsourced are lower-paying than the jobs that are held by employees, the companies’ pay data will become more equal.

Though it’s not yet clear what this link between management and pay inequality means for the broader inequality story, it suggests something interesting for companies. Some managers may believe that successful companies allocate profits to the top earners of the firm, generating more inequality. Our research suggests that’s not necessarily the case. Setting goals, aligning people to achieve those goals, and monitoring their progress toward those goals are hallmarks of successful companies. And, whatever the reason, those practices also seem to go hand-in-hand with more equal pay.

Disclaimer:  Any opinions and conclusions expressed herein are those of the authors and do not necessarily represent the views of the U.S. Census Bureau. All results have been reviewed to ensure that no confidential information is disclosed.

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