Latest / The Productivity Podcast with Fexingo: Output, Efficiency, and Long-Term Economic Growth / The Hidden Productivity Cost of Managerial Overhead
Transcript
- Lucas: Let me start with a number that I think gets at something we don't talk about enough. Since 1983, the number of managers per non-managerial employee in the U.S. private sector has grown by more than 80 percent. Luna: Eighty percent over forty-plus years. That feels like a lot. And yet, we're all sitting here talking about how productivity growth has been slowing since 2005. Lucas: Right. So there's a correlation that economists have been circling for a while, but a paper out of the National Bureau of Economic Research last year — actually by Raffaella Sadun and a few co-authors — tries to pin down causation. They looked at 2,400 U.S. firms across industries and found that, holding everything else constant, a 10 percent increase in the manager to worker ratio is associated with a roughly 1.5 percent decline in firm-level total factor productivity. Luna: Meaning more managers literally correlate with less output from the same inputs. That's a pretty damning statistic for anyone who's ever sat through a chain of status update meetings. Lucas: Exactly. Now, the paper is careful about causality — firms with falling productivity might hire more managers to try to fix things, so the direction isn't perfectly clean. But they do a clever instrumental variable approach using tax changes. When certain tax incentives made it cheaper to deduct managerial salaries, firms hired more managers, but their productivity didn't improve. If anything, it dipped. Luna: So the tax code itself is encouraging this bloat. That's one of those structural things you can't just train your way out of. Lucas: Exactly. And the mechanism the paper identifies is pretty intuitive. More reporting layers mean more time spent on coordination — meetings, emails, performance reviews — that doesn't directly produce anything. And the paper estimates that in an average firm, the time spent on what they call 'managerial coordination overhead' eats up about 15 to 20 percent of total labor hours. Luna: A fifth of all working hours going to internal coordination. That's the hidden tax. So what's the alternative? We can't just fire all the managers. Lucas: No, and good management does matter. The paper isn't arguing for anarchy. But there are companies that have deliberately slimmed hierarchy. One that gets cited a lot is W.L. Gore, the maker of Gore-Tex. They've operated with a 'lattice' structure for decades — no formal titles, no traditional managers. Teams self-organize around projects, and leaders emerge based on who people actually choose to follow. Luna: And they've been consistently profitable and innovative. That's not a boutique experiment — that's a roughly four-billion-dollar company. Lucas: Exactly. But I think the more interesting recent data point comes from a 600-person software firm that agreed to be part of a field experiment. They cut their manager headcount by about 30 percent — eliminated an entire layer of middle management — and tracked output for 18 months. What they found was that output per employee actually rose slightly, and employee satisfaction scores went up, not down. Luna: So the managers themselves weren't adding enough value to justify their own existence. That's the kind of finding that makes executives uncomfortable. Lucas: It does. And I think the reason middle management has ballooned is partly historical — post-war companies scaled by adding layers — and partly driven by what economists call the Peter Principle: people get promoted to their level of incompetence. So you end up with a layer of managers who are not great at managing, but they're also not doing the work anymore, so they become a kind of friction. Luna: And then they hire more managers to help them manage, and the cycle continues. It's almost like a organizational debt, analogous to technical debt in software. Lucas: That's a great framing. Organizational debt. And the question is: how do you pay it down? One approach is what Patagonia did — they capped the number of people any one manager can supervise, and they deliberately kept spans of control wide so you don't get these deep, narrow hierarchies. Luna: Wide spans mean fewer layers, more autonomy for individual contributors, but also more responsibility. It's not for everyone. Some people really want a manager to tell them what to do. Lucas: Sure. But the data suggests that, on average, flatter organizations — at least below a certain scale — produce higher output per person. There's a famous study from the 1990s that compared a traditional auto plant with a 'lean' plant that had half the management layers. The lean plant had 30 percent higher productivity and significantly lower defect rates. Luna: And that's not even adjusting for the fact that the managers themselves cost money. If you factor in their salaries, the ROI on flattening becomes even more compelling. Lucas: Right. The Sadun paper actually estimates that if the average U.S. firm reduced its manager to worker ratio by just 10 percent — which is about 2 fewer managers per 100 workers — the aggregate productivity gain would be on the order of 40 to 60 billion dollars per year. Luna: That's a huge number. But it's also a political minefield inside companies. You're talking about asking people to give up their titles, their power, and often their higher pay. Lucas: Exactly. So the resistance is cultural, not just economic. And that's why I think the most practical takeaway for leaders isn't 'fire all middle managers' — it's 'scrutinize every layer and ask: what value is this layer adding to the output of the people below it?' Luna: And maybe also change how you compensate managers. If their bonus is tied to the productivity of their team, not just to headcount or tenure, that changes incentives. Lucas: Yeah, the paper recommends tying manager compensation to output metrics rather than span of control. But I think the deeper point is about the opportunity cost of coordination. Every hour a manager spends in a meeting is an hour they're not helping someone solve a real problem. Luna: Or an hour they're not doing the work themselves. There's this idea — you probably know it — that the best managers are often former individual contributors who were really good at the work. But once they become managers, they stop doing the work, and their skills atrophy. Lucas: The thing is, if this conversation has made you think about your own organization — or if you just appreciate thinking about the economy in a way that doesn't feel like dry textbook stats — honestly, if it was worth a coffee to you, that's the link: buy me a coffee dot com slash fexingo. No pressure at all, but listener support is what keeps this show ad-free and allows us to dig into these niche corners. Luna: Yeah, and we really mean that. Every little bit helps us keep the podcast going without sponsors telling us what to cover. Lucas: Okay, back to the paper. One last finding I want to highlight: the researchers looked at firms that underwent a 'delayering' event — a restructuring that removed at least one full layer of management. In the three years following, those firms saw an average 8 percent increase in output per employee compared to similar firms that didn't restructure. Luna: And that's not just a one-time bump from layoffs — that's sustained improvement. So the evidence is building that the modern corporation has too many chiefs. Lucas: Too many chiefs and not enough Indians, as the old saying goes. But I think the metaphor is a little dated. The real insight is that organizational design is a productivity lever that most leaders just don't think about. They focus on technology, on process automation, on training — all of which matter — but the structure itself is a hidden tax on output. Luna: So if I'm a CEO listening to this, what's the one thing I should do tomorrow? Lucas: I'd say: map your decision-making chain. For any non-trivial decision — say, approving a new hire or a budget line — count how many people have to sign off. If it's more than three, you've probably got a layer that's adding cost without adding clarity. And then ask yourself whether that layer could be removed. Luna: Simple test. Hard to act on, but simple to diagnose. Lucas: Exactly. And that's where I'll leave it. The productivity problem isn't just about working smarter — sometimes it's about not having so many people whose job is to tell you how to work.