Management Practices Matter More Than You Think

To understand macroeconomic changes, look at how individual companies are run.

Management consultants face perennial questions about what value they add to companies. But management practices go a long way toward explaining why some businesses perform better than others, an important new analysisshows. Perhaps management consultants are onto something after all.

Surprisingly large and growing differences across businesses in wages, productivity, capital returns and worker mobility may influence income inequality and even macroeconomic growth, many recent studies show. Now it seems management practices play a big role in explaining the variations across businesses, at least in manufacturing.

The new study, by a group of well-respected researchers, is based on a Census Bureau survey of about 32,000 U.S. manufacturing plants. The survey asked such things as how frequently managers track performance indicators, how quickly underperforming employees are reassigned or dismissed, and whether managers are promoted based solely on performance and ability.

The researchers used the companies’ answers to construct a management practices index, with higher ratings for plants that do such things as monitor performance, detail targets and tie management incentives to performance. Because the survey included multiple plants within individual firms, the economists were able to examine how practices vary both within companies and between them.

They found, first, that management techniques vary widely from plant to plant. Less than 20 percent use three-quarters or more of the performance-oriented management techniques, for example, while more than a quarter use less than half of them. Perhaps most surprisingly, the authors found that a little more than 40 percent of the variation in overall management practices occurs within the same firms.

They also found that the management techniques matter — a lot. The plants practicing more structured performance-oriented management are more productive, innovative and profitable. Every 10 percent increase in a plant’s management index is associated with a 14 percent increase in labor productivity, for example. And the relationships hold over time: The more performance-oriented a plant becomes, the more productive it is. Companies with higher management scores are also more likely to expand and to survive.

The researchers were able to compare the management approaches with more traditional explanations of business performance — things such as research and development, information-technology expenditures and workers’ skill levels. The authors lined up plants according to total productivity, and looked at differences between those ranking in the 90th percentile and those in the 10th percentile. Management techniques can explain 18 percent of that difference, they found, while R&D accounts for 17 percent; employee skills, 11 percent; and IT variation, 8 percent. In other words, management matters more than conventional explanations for performance.

Finally, the researchers looked into why management practices vary so much. They examined factors such as the competitiveness of the market in which a plant operates, the business environment (including state Right to Work laws), whether there is a college nearby, and learning spillovers from large multinational plants. All these other factors matter, but collectively they explain only about a third of the variation in management techniques.

Whatever the larger explanation, management practices vary substantially, even within manufacturing companies, and they cause big differences in performance. Those differences, in turn, have macroeconomic implications. Someone worried about why wage inequality has risen in the U.S., or why productivity growth has declined, may not immediately think to question why some companies are well managed and others aren’t. But increasingly, the evidence shows that those questions matter.

Originally published at bloombergview.com on April 11, 2017.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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No Raise? It’s Not You. It’s Your Company.

At top-performing firms, workers of all skill levels climb the income ladder.

The kind of company you work for makes a big difference to your chances of getting raises, new research has found. This adds to growing evidence that what goes on inside firms matters beyond their walls. Researchers have shown that company-level differences have become large enough to influence national productivity growth and overall wage inequality. The new study suggests they affect income mobility, too.

Having gathered data on workers and companies from the Census Bureau and the Social Security Administration, researchers John Abowd of the Census Bureau, Kevin McKinney of the California Census Research Data Center and Nellie Zhao of Cornell University categorized workers and their employers along three dimensions: skill, earnings and average company pay. Not surprisingly, they found some correlation between workers and firms. Low-skilled workers tend to work at low-paying companies, for example, and to earn low wages.

From Bloomberg View – Articles by Peter R. Orszag

The Wrong Way to Lower Health-Insurance Premiums

Republicans’ Obamacare replacement would bring lower-value policies.

For proponents of the American Health Care Act, perhaps the most encouraging nugget in the Congressional Budget Office’s otherwise critical analysis is that insurance premiums could fall by 10 percent on average by 2026. Even this prediction is more mirage than reality, however, in part because of an obscure concept known as “actuarial value.”

As many opponents of the Republicans’ Obamacare replacement legislation have already noted, for many people, the decline in premiums would be smaller than the cutback in their subsidies, so they would still end up paying more. And in any case, the predicted fall in premiums partly reflects a troubling rise in the share of older Americans without insurance, a change that would shift the enrollment pool to younger, less expensive beneficiaries.

From Bloomberg View – Articles by Peter R. Orszag

Selling Health Insurance Across State Lines Won’t Save Money

An idea that sounds easy is too complicated to work.

The effort to replace Obamacare faces increasing challenges, the more it is subjected to the harsh light of scrutiny. A good example is the proposal, apparently central to the Republican replacement plans, to allow people to buy health insurance across state lines.

This idea has been put forward as an elixir to all sorts of health sector problems. In his joint address to Congress, President Donald Trump argued that allowing people to buy health insurance in other states would “create a truly competitive national marketplace that will bring costs way down and provide far better care. So important.”

From Bloomberg View – Articles by Peter R. Orszag

Alexander Hamilton Loved Employee Ownership. So Should We.

By protecting jobs, worker equity plans support the whole economy.

Employee equity ownership of companies has been promoted in the U.S. since the country’s founding. After the Revolutionary War, Treasury Secretary Alexander Hamilton fostered the resurgence of the codfish industry by providing financial subsidies — but only for ships that had written profit-sharing agreements with their crews. This program, enacted in 1792, lasted until after the Civil War.

From Bloomberg View – Articles by Peter R. Orszag

Here’s How Trump Will Change Obamacare

Congress will take symbolic steps while states do the work.

Promises made by Donald Trump and Republicans in Congress to repeal and replace the Affordable Care Act are proving to be more complicated than they sounded on the campaign trail. With reality now setting in, what’s most likely to happen?

I expect to see Republicans stage a dramatic early vote to repeal, with legislation that includes only very modest steps toward replacement — and leave most of the work for later. Next, the new administration will aggressively issue waivers allowing states to experiment with different approaches, including changes to Medicaid and private insurance rules. At some point, then, the administration will declare that these state experiments have been so successful, Obamacare no longer exists.

In other words, the repeal vote will be just for show; the waivers will do most of the heavy lifting.

From Bloomberg View – Articles by Peter R. Orszag

 

What Trump Needs to Learn About Planes, Trains and Automobiles

Splashy new projects get the attention, but the real problem is with boring upkeep and operations.

The tensions between President Donald Trump and House Republicans over whether to enact a massive infrastructure bill have slipped from the news a bit, but we should expect that debate to re-emerge this spring and summer. In the meanwhile, while the topic is temporarily off the front pages, we have time to examine what should and shouldn’t happen — which is why I’m excited to participate in a conference that the Hamilton Project is holding on infrastructure today in Washington.

From Bloomberg View – Articles by Peter R. Orszag