NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Does Linking Worker Pay to Firm Performance Help the Best Firms Do Even Better?

Firms that make greater use of group incentive pay decrease voluntary turnover by almost 11 percentage points.

In Does Linking Worker Pay to Firm Performance Help the Best Firms Do Even Better? (NBER Working Paper No. 17745), co-authors Douglas Kruse, Joseph Blasi, and Richard Freeman find that firms that make greater use of group incentive pay with supportive policies decrease voluntary turnover by almost 11 percentage points. Those same firms also enjoy a higher return on equity as a result of combining group incentive pay with policies that develop participatory decision making, high information sharing, and high-trust supervision.

Using data from the 780 companies that applied to the Great Place to Work Institute to be considered one of the"100 Best Companies to Work for in America" from 2005 through 2007, the authors create an index describing the extent of group incentive compensation plans. In general, the companies that apply for this designation are better performing, with a return on equity estimated to be 3.9 percent higher than the industry-year average for firms of the same size. Group compensation, used by about half of the firms in the sample, is measured using a "shared capitalism index" that combines the presence, worker coverage, and impact on worker earnings of Employee Stock Ownership Plans, cash profit sharing plans, gain sharing plans, Deferred Profit-Sharing Plans, and stock options granted in the past year.

Kruse, Blasi, and Freeman also examine the effect of corporate culture on performance, and the interaction of culture with modes of shared compensation. Their measures of corporate culture come from surveys filled out by individual employees as part of the 100 Best Companies evaluation process, which include questions as about the extent to which "management trusts people to do a good job without watching over their shoulders"; whether people working at a company felt they could "count on people to cooperate"; and whether employees felt that they received "a fair share of the profits made by this organization." Firm management also reported on work practices and turnover.

The authors conclude that the combination of group incentive pay and policies that empower employees create a positive workplace culture, and that has the largest effect on voluntary turnover and on the return on equity. They find that ESOPs and deferred profit sharing are particularly linked with supportive policies and culture.

--Linda Gorman

The Digest is not copyrighted and may be reproduced freely with appropriate attribution of source.
 
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