It’s a Fact: Equitable Worker Pay Boosts Business Performance

“The combination of group incentive pay with policies that empower employees and create a positive workplace culture reduces voluntary turnover and increases employee intent to stay and raises return on equity.”

National Bureau of Economic Statistics Working Paper No. 17745, January 2012 by Douglas L. KruseJoseph R. BlasiRichard B. Freeman

There is new, groundbreaking research that adds to our knowledge to the business case for responsible business.

The Great Place to Work (GPTW) data set contains information on 780 firms that applied for the 100 best list in 2005-2007 and covers about 6 million workers, or around 5% of the private sector workforce, as well as information on the firm’s compensation policies and turnover rates. The National Bureau of Economic Statistics used the GPTW dataset to examine the “link between three forms of compensation that tie employee earnings to the performance of the firm – employee stock ownership, profit and gain sharing, and broad-based stock options – and worker reports on managerial practices and workplace culture.”

The researchers use this data to estimate the links among shared economic benefits, work practices, and workplace culture to worker and business performance.

The two most important conclusions of the paper are that:

1) The firms that share economic success through compensation structures and have policies that allow greater employee participation in decisions, and greater information sharing have a more positive workplace culture than other firms.

2) The combination of group incentive pay and policies that empower employees and creates a positive workplace culture increases employee intent to stay with a firm, lowers voluntary turnover, and raises return-on-equity.

It’s important to understand the design of this analysis and what the thresholds are for recognizing “positive corporate behavior.”

In the survey, high scores were only given to firms whose compensation system rewards workers through group incentives where such incentive pay is a potentially large share of worker earnings.

In order to be considered “positive corporate behavior” as a business, one must score points in several of the following eight areas:

  1. Having an Employee Stock Ownership Plan (ESOP);
  2. Having an ESOP owning 50% or more of the company;
  3. Having a stock option plan that covers 25% or more of employees;
  4. Having a stock option plan that covers 50% or more employees;
  5. Having a cash profit/gain‐sharing plan;
  6. Having a cash profit/gain sharing paying more than the median percent of pay;
  7. Having a deferred profit sharing plan; and
  8. Having a deferred profit sharing with a contribution above the median percent of pay.

Other metrics of “positive corporate behavior” include turnover, one of the most important measures of worker satisfaction.

The researchers conclude that shared forms of pay produced must be combined with positive measures of workplace practices and culture in order to produce with higher financial returns. One factor alone provides dramatically less benefit. For example, the interactive effects of both variables in the most highly-rated firms reduce voluntary turnover from 17.6% to 6.3%. Where only one-shared forms of pay are present but not positive measures of workplace practices the difference is closer to 1%.

Disappointingly, the research does not quantify the absolute impact on ROE other than to say it is strongly impacted when both high levels of shared forms of pay and positive measures of workplace practices are present. We can assume that, by other examples the researchers cite, this represents more than a 2% variable but it would require someone (other than me) with a strong background in statistics to see if they could extract additional insights.

One comment

  1. Jeffrey,

    Yes, the lack of quantification of the absolute impact on ROE is lamentable. That one would have been nice to know.

    But there are other studies that measured similar impacts. If I remember correctly, the National Center for Employee Ownership (www.nceo.org) has quoted somewhere that the productivity rises in the range of 12 to 17 percent. NCEO’s director Corey Rosen’s book “Equity: why employee ownership is good for business” is a jem in this regard.

    If you haven’t read it, I recommend it highly.

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