Are bigger companies actually paying higher salaries?

For many years, it has been widely assumed that the larger the company, the higher the salaries of its employees. Is there any empirical evidence to back up this theory? Is the situation the same in all sectors and departments?

This article will investigate whether or not that is true, as well as the reasoning behind it.

The theoretical background behind this phenomenon

One of the central ideas is that in large workforces, each individual performs a more specialized task. Large employers are better able to assign their employees to tasks that they excel at. This means that the work is more efficient and should be highly rewarded.

According to a study conducted by the London School of Economics, there is a strong relationship between spending more time on fewer tasks and working at large firms as well as earning a higher income. The intuition is that individuals who work for large firms focus on a limited number of tasks, become more efficient and productive, and earn higher wages. It is a clear example of how productivity advantages translate into higher wages through rent sharing.

Another important fact is that large corporations have more market power. So, when hiring, they can choose highly skilled employees, who must be compensated for the quality of their work.

Do European salaries follow this rule?

In Europe, average gross salaries range from 44.5k€ in small businesses to 51k€ in large businesses. This fact is the first indication that larger companies do pay higher wages. This rule applies to all industries.

The same research was conducted across multiple departments, and all of them adhere to the rule. The larger the company, regardless of position, the higher the salary.

Deeper analysis for IT positions

The recent TalentUp study examines European salaries to determine which variables influence them, as well as the size of companies. The investigation focuses on the IT department.

The graph below depicts how salaries for IT employees differ depending on the size of their company.

The coloured areas at each level cover salaries ranging from the 25th to the 75th percentile. The lines and dots outside of the coloured areas represent outliers. It’s interesting to see how the majority of salaries are distributed.

Regardless of size, the distribution is more or less consistent across all businesses. The upper tails of the largest companies, those with more than 1,000 employees, are growing. The trend is clearer in the final category, which includes companies with more than 10,000 employees and have the highest average salaries by difference.

Finally, salaries are distributed similarly in businesses with up to 2,000 employees. The average salary rises as a company grows larger than that. It is just a piece of evidence, but it supports the hypothesis that larger companies pay higher wages.

How can small businesses compensate for the wage gap?

Federico D’Alessio, the Head of Talent Acquisition at Nextail shares his thoughts and arguments on the subject so that we may receive an expert’s perspective.

He advocates creating a strong culture and a positive work atmosphere rather than overselling job descriptions. Some advantages become less significant if employees care about the company’s values, such as philanthropy, sustainability, and pride in being a part of the project.

Federico states that “Offering flexible working hours helps to reconcile work and family life. Also, offering training allowances increases employees’ personal development and pride in belonging to the company.”

So to say, since employees value many other things rather than only focusing on salary, small companies offering better benefits can still compete for the best talent.

Conclusion

In summary, all different points of view reach the same conclusion. Larger corporations do pay higher wages.

However, monetary compensation isn’t the only valuable asset that businesses can provide to their employees. Many employees look for other types of benefits at work or hope to hold stock options in their companies. Given its resources, each company must figure out how to attract and retain the best talent. 

Having said that, it is still key to keep an eye on compensation trends. Salary benchmarking reports or salary platforms, such as the ones offered by TalentUp, are crucial to be aware of which salaries are being offered in the market. Once everyone is aware of the wages that other businesses are paying, you can decide whether bonuses or benefits make the difference.

Follow TalentUp on LinkedIn and sign up for our newsletter to receive our most recent articles!