Higher Wages Drive Higher Productivity As Demonstrated by Alteryx Compared To Teradata

Given the recent Silicon Valley Bank’s shutdown — in conjunction with an increasingly recessive macroeconomic scenario — U.S. tech companies need to switch from implementing useless and socially harmful politics to start thinking about the importance of their workforces’ welfare so as to finally accomplish much higher productivity levels — and outstanding financial performances.

Past Research

Wage studies across firms — and decades — have found that higher wages lead to incremental increases in productivity. The earliest prominent study is from the Ford Motor company in 1914, wherein they pulled off the so-called “five-dollar-day” compensation plan for industrial workers — by then, the average hourly remuneration was between $2.00 and $3.00 a day (Bulow & Summers, 1986). According to Lee (1916), productivity increased by 51% at Ford Motor right after the introduction of the five-dollar-day measure — purely boosted by workers’ efforts to perform their tasks harder, faster and more efficiently.

Academic studies and theoretical approaches have also analyzed the relationship between wages and performance. Empirically, Kalecki (1938) found that high-profit industries mostly tended to be high-salary industries. The author asked himself whether there were unspotted workforce skills making a real difference in the firm’s profits (Van Biesebroeck, 2015).

Having tested the efficiency-wage hypothesis that marginal wage increments more than pay for themselves in productivity increases, Levine (1992) found a positive relation between changes in relative wages and changes in total factor productivity. The author concludes, the elasticity of production output regarding wages finally was of the magnitude calculated by efficiency-wage theories (Levine, 1992).

Today’s Reality

With respect to today’s companies, we looked into the evolution of different salary studies within two equally sized companies, in order to identify and point out the respective differences between one another in terms of productivity and revenues. Ought to be mentioned, we utilized the market capitalization indicator to measure both firms’ size, as it represents the total value of an entire company’s stock package — to be exact, it is calculated by multiplying the price of one share by the total number of shares issued and listed (Pavone, 2019).

Furthermore, we picked two “mid-cap” firms — whose market values go from $2B to $10B

— since these specific companies tend to be going through a certain process of increasing market share and improving overall competitiveness. In consequence, mid-cap firms may primarily look after both their productivity and profits inter-annual variations, so as to attract long-term investors and satisfactorily increase market share. The two companies we looked at in our analysis are Teradata and Alteryx.

Teradata is an American software solutions company with a market capitalization of $3.9B. According to the company’s 2023 annual report, its revenues of $1,795 million decreased by 6% in 2022 as compared to 2021, with an underlying 3% decrease in recurring revenue

(Teradata Corporation, 2023, p.29). In other words, its lost revenue is in large part due to its lost customers.

Alteryx, also an American software solutions company, also has a market cap of $3.9B. Unlike Teradata, Alteryx has increased its revenues from $536.135M to $855.354M between December 31st, 2021 and December 31st, 2022 (Alteryx, 2023, p.72), in large part due to increases in customers.

When we look at these two companies’ compensation structures, we find that Teradata does not compensate as well as Alteryx does for many of the same roles; particularly, workforce positions that contribute largely to production achievements — namely, software engineers and software engineering managers.

Specifically, at the time of this writing, Alteryx pays software engineers an average base salary of $140,000, a bonus of $14,000, and a yearly stock package of $17,000 for three years of experience, while Teradata pays software engineers an average base salary of $132,000 and a bonus of $10,000 and requires five years of experience. Alteryx pays software engineering managers an average base salary of $210,000 and a bonus of $32,000, while Teradata pays an average base remuneration of $180,000 and a bonus of $20,000. No data could be found on alternative compensation.

Conclusion

We can conclude then that higher wages leads, at least indirectly, to higher productivity and revenue, in companies that know how to leverage their human capital production. The other added benefit is that higher wages enables companies to attract and retain higher performers, which leads to even more productivity and revenue gains. If their current compensation and management practices continue as is, we can expect Alteryx to benefit from a virtuous upward cycle, while Teradata will suffers from a vicious downward cycle.

References

Alteryx. (2023). Alteryx Annual Report 2023. Retrieved from https://stocklight.com/stocks/us/services/nyse-ayx/ alteryx/annual-reports/nyse-ayx-2023-10K-23607827.pdf

Bulow, J. I., & Summers, L. H. (1986). A theory of dual labor markets with application to industrial policy, discrimination, and Keynesian unemployment. Journal of labor Economics, 4(3, Part 1), 376-414.

Kalecki, Michael (1938), “The Determinants of Distribution of National Income,” Econometrica, 6: 97-112.

Lee, J.R. (1916, May). So Called Profit Sharing System in the Ford Plant. Annals of the American Academy of Political and Social Science. Pp. 297—310.

Levine, D. I. (1992, September 1). Can Wage Increases Pay For Themselves? Tests with a Productive Function. The Economic Journal. Volume 102. Issue 414. Pp. 1102–1115.

Pavone, P. (2019). Market capitalization and financial variables: Evidence from Italian listed

companies. International Journal of Academic Research Business and Social Sciences, 9(3), 1356-1371.

Reich, M., Hall, P., & Jacobs, K. (2003). Living Wages and Economic Performance-The San Francisco Airport Model.

Teradata Corporation. (2023). Teradata Annual Report 2023. Retrieved from https://stocklight.com/stocks/us/ manufacturing/nyse-tdc/teradata/annual-reports/nyse-tdc-2023-10K-23665248.pdf

Van Biesebroeck, J. (2015). How tight is the link between wages and productivity. A Survey of the Literature.

ILO.