Employee productivity revisited

2010-06-22 11:45:00 Allan Engelhardt wrote in CYBAEA Journal:

We have a mild obsession with employee productivity and how that declines as companies get bigger. We have previously found that when you treble the number of workers, you halve their individual productivity which is scary.

We now re-do the analysis four years later and, just because we can, we are using the leading companies of the London stock exchange instead of the largest American companies.

The results also show in this data set. We called it the 3/2 rule: treble the number of workers and you halve their individual productivity. Large FTSE-100 companies with ten times the number of employees are ¼ as productive as their smaller competitors and if all the FTSE-100 companies achieved their average profits per employee, then the index would generate almost £1 trn of additional net profits for the economy. (But see the comment about the likely selection bias before you rush out to de-merge your company.)

[Employee productivity of FTSE 100 companies]
[Employee productivity of FTSE All-Share companies]

So what is happening? We can postulate a couple of effects. Companies may legitimately choose to be in a high-volume, low-margin business. High-margin business may not scale well or scale with the number of employees. And at least for the FTSE-100 analysis, choosing the biggest companies excludes any with both low number of employees and low revenues per employee (see also The 3/2 rule revisited).

But I wonder how much of this effect is down to communication. Bigger companies may have more meetings with more people attending slowing down decision times, innovation velocity, and productivity. It sounds right for many of us who have worked in companies of different sizes.

You can see the technical details of the analysis and run it yourself at: Employee productivity as function of number of workers revisited.

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  1. [0.58] The 3/2 rule of employee productivity

    The more employees your company has, the less productive each of these employees are. It is a generalization, of course, but a useful one and one that is confirmed by most people who have worked for growing organizations. As the company grows, so does the internal processes and the layers of bureaucracy, and the time spent on communications grows rapidly. It is, however, useful to look at the actual numbers. How much does productivity decrease as the organization grows? We analyze the S&P 500 constituents and the answers are frankly frighting: when you triple the number of employees, you halve their productivity .

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    We revisited the 3/2 rule of employee productivity using a larger data set and showing each sector independently. As before, we chose profits per employee as our metric for employee productivity and show it against the number of employees. The resulting per-sector graphs are shown below (click through for a larger version). The data clearly debunk any myths that large companies are more efficient , an oft-quoted statement in merger situations, at least as far as HR is concerned. In total, there is probably a downward trend with size but with a slope of perhaps -0.1 or thereabouts. That still means that when you add 10% employees you lose 1% productivity per employee, which is clearly problematic.

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