Should Employers Pay Their Employees Better?
33 Pages Posted: 3 Feb 2016
Date Written: February 2, 2016
Should employers pay their employees better? Although this question might appear provoking because lowering production costs remains a cornerstone of the contemporary economy, we present new evidence highlighting the benefits a company might reap by paying its employees better. We introduce an original methodology that uses firm economic and financial indicators to build factors that are more uncorrelated than in the classical Fama and French setting. As a result, we uncover a new anomaly in asset pricing that is linked to the average employee remuneration: the more a company spends on salaries and benefits per employee, the better its stock performs, on average. We ensure that the abnormal performance associated with employee remuneration is not explained by other factors, such as stock indexes, capitalization, book-to-market value, or momentum. A plausible rational explanation of the remuneration anomaly involves the positive correlation between pay and employee performance.
Keywords: Anomalies, Asset Pricing, Remuneration, Performance
JEL Classification: C4, G13, G32
Suggested Citation: Suggested Citation