Personnel Economics in Practice Second Edition

PERSONNEL ECONOMICS IN PRACTICE Second Edition Edward P. Lazear Stanford University

Michael Gibbs University of Chicago

WILEY

John Wiley & Sons, Inc.

CONTENTS ABOUT THE AUTHORS PREFACE ACKNOWLEDGMENTS

vii ix xv

PART O N E

SORTING AND INVESTING IN EMPLOYEES

1

CHAPTER 1

SETTING HIRING STANDARDS An Example: Hiring Risky Workers New Hires as Options Analysis A Counterargument Setting Hiring Standards Balancing Benefits Against Costs Foreign Competition The Method of Production How Many Workers to Hire? Other Factors Making Decisions with Imperfect Information Make a Decision Independent ofAnalysis Estimate the Relevant Information Experiment Summary Study Questions References Further Reading Appendix

3 3 3 5 7 9 10 12 13 16 17 18 18 19 19 20 21 22 22 22

CHAPTER 2

RECRUITMENT Introduction Screening Job Applicants Credentials Learning a Worker's Productivity Is Screening Profitable? For Whom? Probation

25 25 26 27 28 31 32 XIX

xx

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Contents

Signaling Who Pays, and Who Benefits? Examples Signaling More Formally: Separating and Pooling Equilibria Which Type of Firm is More Likely to use Signaling? Summary Study Questions References Further Reading Appendix

33 36 37 38 40 40 42 42 43 43

CHAPTER 3

INVESTMENT IN SKILLS Introduction Matching Investments in Education Effects of Costs and Benefits Was Benjamin Franklin Correct? Investments in On the Job Training General vs. Firm-Specific Human Capital Who Should Pay for Training? Implications of On the Job Training Rent Sharing and Compensation Implicit Contracting Summary Study Questions References Further Reading Appendix

47 47 49 50 52 54 57 60 63 69 72 74 75 77 78 78 78

CHAPTER 4

MANAGING TURNOVER Introduction Is Turnover Good or Bad? Importance of Sorting Technical Change Organizational Change Hierarchical Structure Specific Human Capital Retention Strategies Reducing Costs ofLosing Key Employees Embracing Turnover Bidding for Employees Raiding Other Firms: Benefits and Pitfalls Offer Matching

81 81 81 82 83 83 84 84 84 87 88 89 89 93

Contents Layoffs and Buyouts Who to Target for Layoffs Buyouts Summary Study Questions References Further Reading Appendix

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xxi 96 96 99 104 105 105 106 106

PART T w o

ORGANIZATIONAL AND J O B DESIGN

107

CHAPTERS

DECISIONMAKING Introduction The Organization of an Economy Markets as Information Systems Markets as Incentive Systems Markets and Innovation Benefits of Central Planning The Market as Metaphor for Organizational Design Benefits of Centralization Economies of Scale or Public Goods Better Use of Central Knowledge Coordination Benefits of Decentralization Specific vs. General Knowledge Other Benefits of Decentralization Authority and Responsibility Decision Making as a Multistage Process Flat vs. Hierarchical Structures Investing in Better Quality Decision Making Summary Study Questions References Further Reading Appendix

109 109 109 110 112 112 113 114 117 111 118 118 120 120 122 123 124 126 133 136 138 138 139 139

CHAPTER 6

ORGANIZATIONAL STRUCTURE Introduction Types of Organizational Structures Hierarchy Functional Structure Divisional Structure Matrix or Project Structure Network Structure

143 143 145 145 147 148 153 155

xxii

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Contents Which Structure Should a Firm Use? Coordination Two Types of Coordination Problems Coordination Mechanisms Impl ementation Span of Control and Number of Levels in a Hierarchy Skills, Pay, and Structure Evolution of a Firm 's Structure Summary Study Questions References Further Reading

CHAPTER 7

CHAPTER 8

157 158 158 160 163 163 166 167 168 170 170 171

JOB DESIGN Introduction Patterns of Job Design Optimal Job Design: Skills, Tasks, and Decisions Multiskilling and Multitasking Decisions Complementarity and Job Design When to Use Different Job Designs Taylorism Factors Pushing Toward Taylorism or Continuous Improvement Intrinsic Motivation Summary Study Questions References Further Reading Appendix

173 173 174 177 111 183 184 186 186

ADVANCED JOB DESIGN Introduction Teams Group Decision Making Free Rider Effects When to Use Teams Other Benefits of Team Production Implementation of Teams Team Composition Worker- Owned Firms Effects of Information Technology Effects on Organizational Structure Effects on Job Design

2 01 201 202 202 202 203 205 209 212 214 215 215 219

188 192 194 197 197 198 198

Contents High Reliability Organizations Summary Study Questions References Further Reading Appendix

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xxiii 222 224 226 226 227 227

PART T H R E E

PAYING FOR PERFORMANCE

231

CHAPTER 9

PERFORMANCE EVALUATION

237

Introduction Purposes of Performance Evaluation Ways to Evaluate Performance Quantitative Performance Measurement Risk Profile Risk vs. Distortion: Performance Measure Scope Match of the Performance Measure to Job Design Manipulation Subjective Evaluation Why Use Subjective Evaluations? The Benefits of Subjective Evaluations Practical Considerations Summary Study Questions References Further Reading CHAPTER 10

REWARDING PERFORMANCE Introduction How Strong Should Incentives Be? Intuition Imperfect Evaluations and Optimal Incentives Summary: How Strong Should Incentives Be? Paying for Performance: Common Examples Rewards or Penalties? Lump Sums, Demotions, or Promotions Caps on Rewards Applications Profit Sharing and ESOPs Organizational Form and Contracting Motivating Creativity

237 238 238 238 239 241 244 246 247 248 251 253 257 258 259 259 261 261 264 264 269 272 273 21Ъ 276 278 280 280 282 2 84

xxiv

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Contents

Summary Study Questions References Further Reading Appendix

285 286 287 287 287

CHAPTER 11

CAREER-BASED INCENTIVES Introduction Promotions and Incentives Should Promotions be Used as an Incentive System? Promotion Rule: Tournament or Standard? How Do Promotions Generate Incentives? Advanced Issues Turnover Evidence Career Concerns Seniority Pay and Incentives Practical Considerations Summary Study Questions References Further Reading Appendix

293 293 296 296 298 303 308 312 312 313 314 316 317 319 320 320 321

CHAPTER 12

OPTIONS AND EXECUTIVE PAY Introduction Employee Stock Options Stock Options-A Brief Overview Should Firms Grant Employees Options? Options as Incentive Pay Executive Pay What is the Most Important Question? Executive Pay for Performance Other Incentives & Controls Do Executive Incentives Matter? Summary Employee Stock Options Executive Pay Study Questions References Further Reading Appendix

325 325 326 326 327 329 333 334 334 337 338 342 342 342 343 343 344 344

Contents

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xxv

P A R T FOUR

APPLICATIONS

347

CHAPTER 13

BENEFITS Introduction Wages vs. Benefits Why Offer Benefits? Cost Advantage Value Advantage Government Mandate Implementation of Benefits Improving Employee Sorting Cafeteria Plans Pensions Paid Time Off Summary Study Questions References Further Reading

349 349 349 353 353 354 356 357 357 358 360 368 371 372 373 373

CHAPTER 14

ENTREPRENEURSHIP AND INTRAPRENEURSHIP Introduction Entrepreneurship The Choice to become an Entrepreneur Intrapreneurship Internal Markets Creativity vs. Control Speed of Decision Making Reducing Bureaucracy Continuous Improvement Summary Study Questions References Further Reading Appendix

375 375 3 76 377 385 386 388 390 390 391 393 393 394 395 395

CHAPTER 15

T H E EMPLOYMENT RELATIONSHIP Introduction Employment as an Economic Transaction Perfect Competition Imperfect Competition Complex Contracting Summary

397 397 397 397 398 400 402

xxvi

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Contents Communication between Management and Workers CommunicationfromManagement to Workers Communication from Workers to Management The Decision to Empower Workers Improving Cooperation From the Prisoner's Dilemma to Employment Reputation and the Employment Relationship Investing in Reputation Summary Personnel Economics in Practice Study Questions References Further Reading Appendix

GLOSSARY INDEX

403 403 405 408 414 417 418 419 42 5 42 5 427 428 428 429 435 445