Managers are seldom the most popular members of the workforce and are often characterized as pointless pen pushers who add little to their organization. Research from HEC Paris suggests that’s far from the case, and indeed, their pay reflects just 0.5% of the value they create, which compares to between 25-60% for many occupations.
“Employers struggle to identify individual contributions to value creation,” the researchers explain. “They are often unaware of how much more value is created by the highest-performing managers and, consequently, are not prepared to share much value with them during bargaining.”
Showing value
Showing one’s value is hard for most employees, but perhaps particularly so for frontline managers. The researchers analyzed employees at an Italian retail firm, with personnel records available for all store managers between 2007 and 2014. This covered 441 managers across 394 stores.
The researchers were able to distinguish how each manager contributed to the profitability of their store by capitalizing on a corporate policy that rotates managers between stores. Indeed, on average, 23% of managers changed stores in a given year. The results show that the highest-performing managers typically captured around 0.5% of the value created.
As an explanation, the researchers believe that firms may confuse determinants of performance at the unit-level with the contributions of the managers themselves. In other words, the managers are evaluated and rewarded based on unit characteristics rather than their own contributions.
“In many firms both bonuses and performance appraisals are much more closely related to the unit performance than to any persistent differences in the manager’s individual performance,” they explain.
This meant that the variation in manager pay was roughly 11 times smaller than the variation in their performance. Despite this, turnover among managers was very low, with just 25 managers quitting across the eight-year study period. Simply put: the firm was able to avoid sharing value with the best employees with no prejudice to its financial sustainability.
“An improvement in firms’ ability to value personal contributions, however, would probably translate into enhanced profitability through the better capacity to allocate frontline managers across units, and thus into an increased willingness to share the value created,” the researchers conclude.
