Management, performance and pay

There is a rich literature showing that the adoption of structured management practices plays a crucial role in explaining the large observed variation in firm performance across industries and countries, but there is less evidence on how management practices affect labour outcomes, in particular wages and wage inequality.

This paper combines several different Portuguese datasets, including a large survey on management practices in 2016, in order to examine the relationship between structured management practices, firm performance and wages. Management practices are measured along three different dimensions, related to incentives, monitoring and target setting. The data confirm that the adoption of advanced management practices are more prevalent in larger firms, in multinational firms, and in firms with a higher-skilled workforce. The use of structured management practices is also associated with higher labour productivity.

The main analysis studies the relationship between management practices and different measures of wages and wage inequality. The rsults suggest that the use of more structured management practices is positively related with average pay and within-firm pay inequality, and that these relationships are almost entirely driven by management practices related to incentives. The positive relationship between management practices and average pay applies to all parts of the wage distribution and for all occupational skill groups, but the relationship is much stronger towards the top of the wage distribution and for workers in high-skilled occupations. 

The paper also identifies the presence of work councils as a mediating factor in the relationship between management practices and worker pay. In firms with worker respresentation through work councils, the productivity gains of structured management practices are to a larger extent transmitted to workers in the form of higher average wages, but in a less unequal way across the workforce.

Click here to go to the paper by Natalia P. Monteiro and OddRune Straume.