How do good managers impact worker productivity? Mechanisms like motivation and monitoring are well-known, but how important are other channels? This column analyses new data from a large multinational firm to find that good managers – as revealed by their speed of promotion – significantly boost worker performance. The key mechanism behind this effect is the reallocation of workers through lateral and vertical transfers within the firm, which enhances productivity by creating better job matches. Notably, the benefits persist even after the good managers depart. Based on the findings, firms should place high value on the allocative role of managers and effective job matchmaking to improve worker productivity.
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Authors
Virginia Minni
Assistant Professor of Economics in the Booth School of Business University Of Chicago
What makes some firms more productive than others? Beyond factors like technology and innovation, one of the most well-documented internal drivers is management (Bloom et al. 2007). The impacts of good management on firm performance via targeted incentives to improve productivity, like variable pay or promotions, as well as investments in selective employee recruiting and retention, are largely intuitive (Bloom and Van Reenen, 2011). It is also easy to understand how individual managers can contribute to firm productivity via for example worker motivation and monitoring. Yet another crucial – but less explored – way that managers may improve productivity is through allocation: deciding who works on what. While existing research has studied the allocation of workers to firms in labour markets (e.g. Jovanovic 1979, Card et al. 2018), evidence about internal labour markets and the role of managers within them in shaping the allocation of workers to jobs is scarce. In one study, Adhvaryu et al. (2019) find that good managers in a garment manufacturing setting respond to short-term productivity shocks due to pollution by reallocating workers to new tasks. But how important is worker job reallocation within firms for workers’ long-term careers and firm productivity?
In a new paper (Minni 2024), I shed light on this topic, exploring how good managers affect worker and firm productivity through the allocation of workers to jobs within the firm. Using personnel records from a large multinational firm, I analyse data covering 200,000 white-collar workers and 30,000 middle managers over ten years and across more than 100 countries. By isolating good managers and taking advantage of a managerial rotation policy within the firm, I can pinpoint their impact on workers and firm-wide productivity.
Understanding ‘good’ managers
To start, I define good managers as those promoted before the age of 30 (‘high-flyers’), representing around 30% of all middle managers. Intuitively, early promotion is a clear sign of managers’ success within the firm. I also observe that being a high-flyer is positively correlated with other measures of success such as future salary growth and top-down and bottom-up performance ratings, confirming this interpretation’s validity.
Next, I leverage managers’ transitions across teams arising from a firm’s rotation policy. In corporate settings, managers are often reassigned to different teams to broaden their skills, bringing them into contact with different teams of workers. Anecdotal and empirical evidence suggest these rotations are roughly random and not based on the team’s or manager’s prior performance. By examining these rotations with an event study design, I can estimate the causal impact on workers of switching from a low-flyer to a high-flyer (good) manager, and vice versa.
Good managers and job reallocation
First, I find that gaining a good manager causes significant worker reallocation within the firm through lateral transfers. Lateral transfers involve moving to different jobs at the same pay level. Compared with workers who experience a low-to-low manager transition, those workers under a low-to-high transition have, on average, 57% more lateral moves up to seven years after the transition. Th top panel of Figure 1 illustrates these manager-induced job moves. When decomposing these lateral moves (bottom panel), 48% of them occur within the team (supervised by the same manager), 37% within the same function but across different teams, and the remaining ones are cross-functional, more unusual, transfers. The effects on lateral reallocation do not come alongside higher employee attrition – good managers do not affect worker exit, whether one considers quits or layoffs.
Figure 1 Gaining a high-flyer manager and job reallocation
Do good managers increase productivity through better job matches?
Good managers also have a positive on their subordinates’ compensation, as seen in Figure 2. Compared with workers who experienced a low-to-low manager transition, those workers under a low-to-high transition have, on average, a 41% higher number of salary grade increases within seven years after the transition. This meaningfully translates into higher workers’ salaries: workers exposed to good managers have a 10% higher overall pay. Ruling out the possibility that managers are simply inflating pay, sales incentives records reveal that workers’ sales performance also increases by 0.18 of a standard deviation. This indicates that good managers genuinely boost the performance of their workers, resulting in higher salaries and bonuses.
Figure 2 Gaining a high-flyer manager and salary growth
These results suggest that good managers improve performance by discovering workers’ talents and matching them to the right internal jobs, both boosting productivity, and providing compensation benefits to the worker. Moreover, once a worker has found the right job match through job allocation, the gains cannot be erased.
This interpretation is further strengthened by ruling out other potential channels. For example, workers’ lateral moves do not occur within the managers’ networks, ruling out explanations related to high-flyer managers having greater social connections. Additionally, there is no distinct disadvantage for workers losing a good manager, besides the lack of future growth that good managers facilitate. In particular, Figure 3 shows that the impact of losing a good manager is close to zero. This indicates that there are dynamic benefits from being exposed, even for a short time, to a good manager, which endure even when a worker transitions to working with a low-flying manager. The fact that losing a good manager does not result in symmetric negative outcomes for workers indicates that contemporaneous channels such as motivation and monitoring workers to exert high effort are only part of the way good managers can impact worker productivity.
Figure 3 Effects of losing a high-flyer manager
Altogether, an efficient allocation of workers to jobs within sites should result in higher productivity for the entire site, creating a link between individual-level effects and firm-level outcomes. In line with this intuition, I observe that factories whose workers had more past exposure to good managers are more productive as a whole. Figure 4 shows that the higher workers’ past exposure to high-flyers is, the higher the output per worker (top panel), while the lower the cost per output (bottom panel).
Figure 4 Factory productivity and past exposure to high-flyer managers
Good managers and internal talent development
The firm I have been collaborating with recently introduced two employee development platforms aimed at fostering internal talent. One platform is a talent marketplace tool allowing workers to signal their skills, search for internal jobs, and share learning opportunities. The other platform is a tool that allows workers to apply for short-term company projects outside their current team, referred to as ‘flexible projects’. As both platforms are meant to make the best use of workers’ skills, we can hypothesise that good managers would be more likely to have their employees engage with these tools.
I find that good managers not only signal more strategy and talent management skills compared to project management skills, but also that workers exposed to good managers are much more likely to participate in these employee development platforms. When it comes to the chance to work on flexible projects, workers with a good manager are 17% more likely to register to the platform, 5% more likely to complete their profiles in full, and 26% more likely to apply to flexible projects. This evidence suggests that good managers have a tangible impact on their workers when it comes to voluntary worker development programmes within the firm.
Takeaways
Firms should note that the impact of good managers on worker productivity extends beyond traditional measures like providing incentives and monitoring employees. This research suggests that good managers improve labour productivity by acting as the ‘visible hands’ of the market within firms, helping workers move to better-fitting jobs within the firm through lateral and vertical transfers. This effective reallocation improves outcomes for workers and productivity for the firm. The effects, which can be developed in a relatively short time, persist for many years and there is no negative impact when the relationship between a worker and a good manager ends. Moreover, they are of potentially zero cost, as they do not require any firing, hiring, or training of workers.
In light of these findings, firms should focus on maintaining fluid internal labour markets and on empowering managers to play an active role in worker reallocation. As new technologies like artificial intelligence displace certain jobs and create others, the allocative role of managers is only likely to become more important.
