It seems logical that firms that are better run will do better, not least because of their ability to attract and retain higher quality workers.  Research from Cornell SC Johnson College of Business sets out to understand precisely what managerial practices contribute to this improvement in outcomes.

“We know a lot about the labor market, and we know a lot about incentives across firms and within firms,” the researchers say.  “But now we are learning more about how managers at different firms are actually going through the process of picking their workers—what’s happening inside the ‘black box.'”

Under the hood

The researchers gathered 10 years’ worth of employee data from a number of manufacturing firms in Brazil.  The data revealed that those companies with highly structured management practices were better able to attract and retain highly skilled workers as well as high-quality managers.

Brazil was chosen in large part because data exists on the occupation of workers as well as the various reasons workers give for leaving their employer.  In total, they looked at observations involving nearly 100 million workers from over 4 million organizations.

The management practices of the firms were determined by analyzing data from the World Management Survey.  A well-managed firm was defined as one that scored at least 3 out of 5 on the grid, with the average Brazilian firm scoring 2.66.

They then looked at the movement of employees from firm to firm and were able to estimate the increase in salary they secured via each move and therefore the value of their portable skills.

Influencing productivity

The researchers argue that the impact of a firm’s management practices are not only felt on the individual firm but can extend across the entire labor market.

“The better-managed firms are the ones who were growing in terms of employment,” they say. “By the end of our sample period, they had a larger share of the workers, relative to the other firms in our sample. This suggests better-managed firms are the ones growing.

“And workers move between firms, and learn things along the way,” they continue. “So if you have a good worker who spends time at a good firm, there’s going to be some sort of ‘human capital’ that is added to this worker. That then is going to be portable, something they’re going to take somewhere else.”

The authors argue that one of the key changes the pandemic has introduced into the workplace is one of observability, especially if more of us are working from home.

“The observability of work is going to be a much more important binding constraint for a lot of managers,” the researchers conclude. “And it’s going to be interesting to see how many of these practices can actually still be used across different industries.”