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Salary factor

Rubén Briones



It is well known that a happy employee performs better at work than one who is unhappy. On the other hand, employee’s happiness is difficult to measure, different people find happiness in different things, but it is clear that salary is usually a key factor.

So, the question I ask myself is: will there be a risk-premium in the market in favour of companies that pay their employees better, will there be a salary factor, just as there is a value, quality, low vol factors?


I have recently read the biographies of Ray Dalio (Principles: Life and Work) and Jim Simons (The Man Who Solved The Market), founders of two of today’s hedge funds with the best track-record: Bridgewater Associates and Renaissance Technologies.

And apart from recommending them to anyone interested in financial markets, I was surprised by their emphasis on how important it is to pay your employees according to their performance. After reflecting on the great success they both had with their companies, I wondered if there was a generalized risk-premium in those companies that paid their employees the best?

The following is an attempt to answer this question, using a fully quantitative approach.


There are two hypotheses that I would like to test:

  • Hypothesis A: companies that pay their employees more get a risk-premium in the market.
  • Hypothesis B: companies that pay more in line with their performance obtain a risk-premium in the market.

It might seem that both hypotheses are very similar, but in my view, there is a big difference.

On the one hand, hypothesis A says that the more an employee is paid, the better he/she will perform, and therefore, the better results his/her company will obtain, and as a final consequence, the market will value the company more positively in the stock market.

But hypothesis B means is that employees do not perform better simply because they have a good salary, but that they perform better when they see that their good/bad work has a direct impact on their salary. Perhaps this hypothesis is not so much linked to a fixed salary, but rather to the bonuses or performance that employees are paid.

I think we have all experienced how sometimes when people have a certain job/salary security they get comfortable and have no incentive to improve and grow. Most likely, and unfortunately, we all have the example of public administration in our minds…


Personally, I am more hopeful about hypothesis B than A. And I have to say that both Dalio and Simons, what emphasized the most is to pay according to the performance of each employee.

Here are some of their quotes:

It’s a basic reality that if you don’t experience the consequences of your actions, you’ll take less ownership of them. Make sure you structure incentives and penalties that encourage people to take full ownership of what they do.

Ray Dalio (Principles: Life and Work)

You know your formula from the beginning of the year. It’s the same as everyone else’s with just a couple of different coefficients, depending on your position,” says Glen Whitney, who was a top manager of Renaissance’s infrastructure. “You want a bigger bonus? Help the fund get higher returns in whatever way you can.

The Man Who Solved The Market: How Jim Simons Launched the Quant Revolution

Anyway, let the data dictate the conclusions!


The following annual data have been used for this study:

  • Salaries And Other Employee Benefits.
  • Total Employees
  • Net Income

When trying to search for this data on the current components of the S&P 500, I found that there was very little completeness on salary data. Some companies didn’t have data, others published it for only a few years, and so on.

So to avoid making assumptions when there is no data, I decided to stick with the 19 companies for which there was the completeness of the data. Coincidentally, they are all companies from the financial sector:

Bonus in financial industry
Analyzed companies


To test our hypotheses, we will carry out a study by percentiles, so that we can check whether there is a clear risk-premium in favour of the companies that pay the best, or that pay the best according to employees performance.

The methodology will be very simple:

  1. At the beginning of each year, since 2000, rank the 19 companies in the study according to the following formulas for each hypothesis:
    • ratio A = Salaries And Other Employee Benefits / Total Employees
    • ratio B = (Salaries And Other Employee Benefits / Total Employees) / Net Income
  2. Select the companies in the q percentile of this ranking (we will give values to q with jumps of 10%).
  3. Invest equally weighted in the selected stocks.
  4. Rebalance the portfolio at the beginning of the following year after calculating the new ranking.


To evaluate our hypotheses we will compare the results obtained over each decile. And put them in perspective with the results that would have been obtained if we had invested equally weighted in the 19 universe companies (which will be our benchmark).

As an additional measure of robustness, we will look at the results obtained over different periods, not just since 2000, to check that our hypothesis is valid over time.

Hypothesis A

Below is a table showing the results after using the ratio of hypothesis A:

Hypothesis A results since 2000.

We can see that there is not any clear pattern in the results. And if we analyze the results obtained in other windows, we still do not see a clear relationship:

Hypothesis A results since 2005 and 2010.

Hypothesis B

Below is a table with the results after using the ratio of hypothesis B:

Hypothesis B results since 2000.

We can see that there is a clear pattern that suggests that the companies that pay more, according to their results, have higher returns and a better risk-reward ratio.

And if we also analyze the simulation results in the most recent periods, we see that the correlation is still very clear:

Hypothesis B results since 2005 and 2010.

So we could certify that the bonus factor does exist! If your company doesn’t pay performance bonuses, show this data to your boss 😉


  • There is a risk-premium in the market for those companies that pay more to their employees, and they do it according to the company’s results (indirectly, according to the performance and productivity of their employees). The bonus factor does exist, at least in the financial sector.
  • There is no clear evidence that simply paying your employees more leads to a risk-premium in the market. There is no salary factor.
  • The bonus factor strategy may be difficult to implement in real life due to data availability.
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3 years ago

Es una buena estrategia y mejor política copiar los modelos exitosos si deseamos aumentar la productividad. Los dos personas citadas tienen una productividad extraordinaria a lo largo de décadas así que habría que copiarles sus estrategias