Satisfied Employees Should Pay Off For Company Execs.

If a company’s survival depends on the cooperation and commitment of its workforce, rewarding top managers for keeping employees productive and satisfied can be just as important as their efforts to enhance quarterly earnings — maybe even more so, according to a new Rice study.

Companies whose employees are disgruntled over pay inequity should consider designing incentive systems that hold their top managers accountable for more than just the bottom line. A Rice researcher concludes that traditional financial accounting measures alone are not the most effective means for evaluating executives in labor intensive firms. Executives’ bonus considerations should also be based on employee and customer satisfaction, product quality and other non-financial and human resources-related outcomes.

“When companies include non-financial measures such as employee satisfaction in their reward system, it sends a clear message throughout their organization that employees matter,” says Sally Widener, an expert on management control systems at Rice’ s Jesse H. Jones Graduate School of Management.

“For example, managers who are evaluated strictly on the basis of financial measures aren’t likely to invest in employee training because such activities translate into depressed profitability in the short term.”

How a company designs its incentive scheme is particularly important in organizations where there are large gaps in pay between lower- and higher-echelon employees. Other studies show that when employees perceive these types of pay structures as inequitable, they can become less cooperative and less committed to the company’s goals.

“If managers know their bonus compensation depends on workers’ satisfaction, which, in turn, can have an impact on quality and customer satisfaction, they’re more likely to focus on getting employees to work together,” Widener says.

In a forthcoming article in Management Accounting Research titled “Human Capital, Pay Structure and the Use of Performance Measures in Bonus Compensation,” Widener examines the use of performance measures in executive bonus compensation to determine whether firms that rely heavily on labor to sustain their operations combine non-financial with traditional financial measures.

“Applying these measures doesn’t address the inequity of the pay structure, but my study indicates they are used to help mitigate its negative effects.”

Widener is experienced in both public and private accounting, and her research on performance measurement and control within organizations is widely published in such scholarly publications as the Journal of Accounting and Economics, Accounting, Organizations and Society, and the Journal of Management Accounting Research .

A member of the Jones School since 2001, she earned her master’s degree in accounting from Colorado State University and her Ph.D. in business administration from the University of Colorado at Boulder.

For more information at http://www.rice.edu