Employee productivity revisited

Using London Stock Exchange data


22 June 2010

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.)

Profit per employee for the FTSE 100 companies

Profit per employee for the 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.

Get the code

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