In Employee Compensation, You Get What You Pay For, Says Study

A study of more than 400 managers in a national hotel chain finds that the more those managers are compensated relative to their peers, the better their performance. Researchers argue that the results would hold true across industry sectors.

“In many companies, employee performance is rewarded with bonuses – so companies pay for what they get out of each employee,” says Jim Hesford, co-author of the study and an associate professor of accounting at the University of Missouri – St. Louis. “In this case, the company didn’t pay remarkable bonuses. But we found that higher compensation results in better performance – so you get what you pay for.”

The researchers got the idea for the study when they noted that some hotels were performing much better than others in the same national chain. While investigating what might be responsible for the discrepancy, the researchers found that one of the perks of being a hotel manager in the chain is a free, on-site apartment. To calculate each manager’s compensation, the researchers had to incorporate not only their salary, but the value of the apartment.

The study compared each manager’s overall compensation with the compensation of hotel managers who worked for other chains in the same zip code.

The researchers evaluated a suite of variables to assess each manager’s performance, including overall revenue for each hotel, customer satisfaction survey results and hotel profits.

Computational models accounted for a variety of outside factors, but the findings were straightforward: the more a hotel’s manager made, relative to his or her peers in the same geographic area, the better the manager’s performance. The findings were slightly more pronounced if a hotel was in an area with a lot of competition, and slightly less pronounced if there was more intense oversight from regional management with the parent company.

“One of the take-home messages here is that higher relative compensation attracts more capable candidates and makes people more likely to be conscientious,” says Mina Pizzini, co-author of the study and an associate professor of accounting at Texas State University. “The higher compensation pays for itself. Those findings are relevant to anyone in a managerial position tasked with making decisions, overseeing staff or working with customers.”

“In other words, the research reinforces a lesson that good leaders have known for a long time: if you treat your employees well, they’ll perform for you,” Hesford says.

The paper, “Using Fixed Wages for Management Control: An Intra-Firm Test of the Effect of Relative Compensation on Performance,” appears in the Journal of Management Accounting Research. The paper was co-authored by Nicolas Mangin, an assistant professor at the University of Groningen.

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