Good management matters. If you’re reading this you probably don’t need convincing, but one of the most significant milestones in economic research was documenting empirically that it really is true. A new paper builds on this work and takes it one step further. Its main finding is that the difference between well-managed and poorly managed firms depends in large part on the quality of the people they hire as managers.
Well-run companies set stretch targets on productivity and other parameters, base the compensation and promotions they offer on meeting those targets, and constantly measure results — but many firms do none of those things. Second, our indicators of better management and superior performance are strongly correlated with measures such as productivity, return on capital employed and firm survival.
Indeed, a one-point increment in a five-point management score that we created — the equivalent of going from the bottom third to the top third of the group — was associated with 23% greater productivity. Third, management makes a difference in shaping national performance. For example, variation in management accounts for a quarter of the roughly 30% productivity gap between the US and Europe. It makes sense that hiring the right people in managerial roles matters a lot. Well-managed firms also tend to pay their workers better.
From: Proof That Good Managers Really Do Make a Difference