Employee Value Added: A New Measure of Gain‐Sharing between Labor and Capital

Stephen F. O'Byrne and Shivaram Rajgopal

Journal of Applied Corporate Finance, 2022, vol. 34, issue 2, 30-44

Abstract: Most investors are aware of economic profit concepts that compare company profits with the opportunity cost of the capital used to generate those profits, but few investors try to compute similar value added measures for employees, or to assess whether employee value added is aligned with investor value added or whether such alignment is beneficial for investors. The fact that 85% of public companies do not report total employee pay suggests an opportunity for companies to improve both their disclosure practices and their ability to measure stakeholder outcomes and their alignment with shareholder interests. In this article, the authors show how to estimate the following for U.S. public companies: employee pay (for those that don't already report it); average alternative or “market” pay; and employee value added, which is the aggregate after‐tax difference between actual and market pay. Reflecting the tendency of public companies to pay more than other private‐ and public‐sector “civilian” employers, the authors show that the aggregate employee value added at S&P 1500 companies in 2020 represented 30% of the total value added of investors and employees—a number that has been rising more or less steadily from zero since the early 1990s. The not so good news, however, is that the authors find little difference in employee value added between positive and negative EVA companies. To further explore the relationship between employee and investor value added, the authors present a methodology for measuring four key dimensions of employee value added: alignment with investor value added; employee pay leverage; relative pay risk; and the employee pay premium for baseline performance (at zero investor value added). After illustrating those measures in a comparison between Costco and Walmart, the authors' analysis shows that a small number of companies like Costco treat employees more like equity holders with high alignment, but also higher pay risk and a lower pay premium at zero investor value added. The vast majority of U.S. companies appear to be more like Walmart than Costco in treating employees more like bond holders with low alignment with investors, but also lower pay risk and a higher pay premium for baseline performance (or zero investor value added).

Date: 2022
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