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

96/12

33 Pages Posted: 14 Oct 1996

See all articles by Bruce A. Rayton

Bruce A. Rayton

University of Bath - School of Management

Date Written: July 24, 1996

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. In these regressions, firm quality is measured by the propensity to outperform the industry average of returns to common stock. Separation by an alternate definition of firm quality, the S&P bond rating, generates similar results. 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.

JEL Classification: G3, J3, L1

Suggested Citation

Rayton, Bruce A., Firm Performance and Compensation Structure: Performance Elasticities of Average Employee Compensation (July 24, 1996). 96/12, Available at SSRN: https://ssrn.com/abstract=1660 or http://dx.doi.org/10.2139/ssrn.1660

Bruce A. Rayton (Contact Author)

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

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