Are hierarchical companies better?

More than three years ago, I wrote about an experiment that showed that teams with a flat hierarchy are less productive. I made no secret of my antipathy to stupid management theories. One of these, in my opinion, is the need to have as few layers as possible to run a business effectively. The criticism of that article from readers was universal. So let me double it with evidence from a new study.

Michael Ewens and Xavier Giroud of Columbia University noticed that thirty years after Baker and Holmstrom complained that when it comes to determining how companies organize their labor, there ‘Too many theories, too few facts’This was still the case in 2025. I hasten to add that this reliance on theories without testing them empirically is one of the main problems I have with “management science” in general.

What Ewens and Giroud did to help fill the empirical gap was to look through the LinkedIn resumes of 16 million people, which allowed them to reconstruct the corporate hierarchies of more than 2,500 U.S. public companies.

The first thing they noticed is that despite decades of efforts to flatten corporate hierarchy, the number of organizational layers has remained remarkably stable over the past decade. The average number of organizational layers in a company was nine.

Average and median number of layers at US companies

Source: Ewens and Giroud (2025)

However, there are major differences between sectors and within sectors. Healthcare companies typically have fewer tiers than other industries, while retailers typically have slightly more than others. Interestingly, the technology sector, which prides itself on its dynamism, typically has about the same number of layers as other sectors. But as you might expect, companies with more employees tend to have more hierarchical layers, giving rise to major differences within an industry.

Hierarchical layers by major industry

Source: Ewens and Giroud (2025)

So, what’s the bottom line? How does the number of layers in a company affect profitability and other metrics? Here you can see the impact of each additional organizational layer on ROA, gross and net margin, as well as administrative costs (SG&A costs). I should mention here that this measures the change in these metrics for each layer measured on a log scale, but let’s ignore that technical aspect for now.

Impact of an additional hierarchical layer on business statistics

Source: Ewens and Giroud (2025)

It may surprise you to see this, but companies with a more hierarchical structure and more organizational layers are more profitable and have higher gross and net margins. Yes, they have higher administrative costs, but these additional costs are offset by higher productivity and therefore higher profitability.

And now I invite all my readers to comment again on why flat hierarchies are better and companies with fewer layers are more efficient.