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

Bruce Rayton ()

Labor and Demography from EconWPA

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.

Keywords: incentives; agency costs; profit-sharing; pay-performance sensitivities; firm performance (search for similar items in EconPapers)
JEL-codes: J33 L14 G3 (search for similar items in EconPapers)
Date: 1996-07-10, Revised 1998-04-15
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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Related works:
Journal Article: Firm performance and compensation structure: performance elasticities of average employee compensation (2003)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpla:9607001

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