Personnel Economics in Practice (Paperback, 3, Revised)

ABOUT THE AUTHORS vii

PREFACE ix

ACKNOWLEDGMENTS xv

PART ONE SORTING AND INVESTING IN EMPLOYEES 1

CHAPTER 1 SETTING HIRING STANDARDS 3

An Example: Hiring Risky Workers 3

New Hires as Options 3

Analysis 5

A Counterargument 7

Setting Hiring Standards 9

Balancing Benefits Against Costs 10

Foreign Competition 12

The Method of Production 13

How Many Workers to Hire? 16

Other Factors 17

Making Decisions with Imperfect Information 18

Make a Decision Independent of Analysis 18

Estimate the Relevant Information 19

Experiment 19

Summary 20

Study Questions 21

References 22

Further Reading 22

Appendix (available online) 22

CHAPTER 2 RECRUITMENT 25

Introduction 25

Screening Job Applicants 26

Credentials 27

Learning a Worker’s Productivity 28

Is Screening Profitable? For Whom? 31

Probation 32

Signaling 33

Who Pays, and Who Benefits? 36

Examples 37

Signaling More Formally: Separating and Pooling

Equilibria 38

Which Type of Firm is More Likely to use Signaling? 40

Summary 40

Study Questions 42

References 42

Further Reading 43

Appendix (available online) 43

CHAPTER 3 INVESTMENT IN SKILLS 47

Introduction 47

Matching 49

Investments in Education 50

Effects of Costs and Benefits 52

Was Benjamin Franklin Correct? 54

Investments in On the Job Training 57

General vs. Firm-Specific Human Capital 60

Who Should Pay for Training? 63

Implications of On the Job Training 69

Rent Sharing and Compensation 72

Implicit Contracting 74

Summary 75

Study Questions 77

References 78

Further Reading 78

Appendix (available online) 78

CHAPTER 4 MANAGING TURNOVER 81

Introduction 81

Is Turnover Good or Bad? 81

Importance of Sorting 82

Technical Change 83

Organizational Change 83

Hierarchical Structure 84

Specific Human Capital 84

Retention Strategies 84

Reducing Costs of Losing Key Employees 87

Embracing Turnover 88

Bidding for Employees 89

Raiding Other Firms: Benefits and Pitfalls 89

Offer Matching 93

Layoffs and Buyouts 96

Who to Target for Layoffs 96

Buyouts 99

Summary 104

Study Questions 105

References 105

Further Reading 106

Appendix (available online) 106

PART TWO ORGANIZATIONAL AND JOB DESIGN 107

CHAPTER 5 DECISION MAKING 109

Introduction 109

The Organization of an Economy 109

Markets as Information Systems 110

Markets as Incentive Systems 112

Markets and Innovation 112

Benefits of Central Planning 113

The Market as Metaphor for Organizational Design 114

Benefits of Centralization 117

Economies of Scale or Public Goods 117

Better Use of Central Knowledge 118

Coordination 118

Benefits of Decentralization 120

Specific vs. General Knowledge 120

Other Benefits of Decentralization 122

Authority and Responsibility 123

Decision Making as a Multistage Process 124

Flat vs. Hierarchical Structures 126

Investing in Better Quality Decision Making 133

Summary 136

Study Questions 138

References 138

Further Reading 139

Appendix (available online) 139

CHAPTER 6 ORGANIZATIONAL STRUCTURE 143

Introduction 143

Types of Organizational Structures 145

Hierarchy 145

Functional Structure 147

Divisional Structure 148

Matrix or Project Structure 153

Network Structure 155

Which Structure Should a Firm Use? 157

Coordination 158

Two Types of Coordination Problems 158

Coordination Mechanisms 160

Implementation 163

Span of Control and Number of Levels in a Hierarchy 163

Skills, Pay, and Structure 166

Evolution of a Firm’s Structure 167

Summary 168

Study Questions 170

References 170

Further Reading 171

CHAPTER 7 JOB DESIGN 173

Introduction 173

Patterns of Job Design 174

Optimal Job Design: Skills, Tasks, and Decisions 177

Multiskilling and Multitasking 177

Decisions 183

Complementarity and Job Design 184

When to Use Different Job Designs 186

Taylorism 186

Factors Pushing Toward Taylorism or Continuous Improvement 188

Intrinsic Motivation 192

Summary 194

Study Questions 197

References 197

Further Reading 198

Appendix (available online) 198

CHAPTER 8 ADVANCED JOB DESIGN 201

Introduction 201

Teams 202

Group Decision Making 202

Free Rider Effects 202

When to Use Teams 203

Other Benefits of Team Production 205

Implementation of Teams 209

Team Composition 212

Worker-Owned Firms 214

Effects of Information Technology 215

Effects on Organizational Structure 215

Effects on Job Design 219

High Reliability Organizations 222

Summary 224

Study Questions 226

References 226

Further Reading 227

Appendix (available online) 227

PART THREE PAYING FOR PERFORMANCE 231

CHAPTER 9 PERFORMANCE EVALUATION 237

Introduction 237

Purposes of Performance Evaluation 238

Ways to Evaluate Performance 238

Quantitative Performance Measurement 238

Risk Profile 239

Risk vs. Distortion: Performance Measure Scope 241

Match of the Performance Measure to Job Design 244

Manipulation 246

Subjective Evaluation 247

Why Use Subjective Evaluations? 248

The Benefits of Subjective Evaluations 251

Practical Considerations 253

Summary 257

Study Questions 258

References 259

Further Reading 259

CHAPTER 10 REWARDING PERFORMANCE 261

Introduction 261

How Strong Should Incentives Be? 264

Intuition 264

Imperfect Evaluations and Optimal Incentives 269

Summary: How Strong Should Incentives Be? 272

Paying for Performance: Common Examples 273

Rewards or Penalties? 273

Lump Sums, Demotions, or Promotions 276

Caps on Rewards 278

Applications 280

Profit Sharing and ESOPs 280

Organizational Form and Contracting 282

Motivating Creativity 284

Summary 285

Study Questions 286

References 287

Further Reading 287

Appendix (available online) 287

CHAPTER 11 CAREER-BASED INCENTIVES 293

Introduction 293

Promotions and Incentives 296

Should Promotions be Used as an Incentive System? 296

Promotion Rule: Tournament or Standard? 298

How Do Promotions Generate Incentives? 303

Advanced Issues 308

Turnover 312

Evidence 312

Career Concerns 313

Seniority Pay and Incentives 314

Practical Considerations 316

Summary 317

Study Questions 319

References 320

Further Reading 320

Appendix (available online)  321

CHAPTER 12 OPTIONS AND EXECUTIVE PAY 325

Introduction 325

Employee Stock Options 326

Stock Options–A Brief Overview 326

Should Firms Grant Employees Options? 327

Options as Incentive Pay 329

Executive Pay 333

What is the Most Important Question? 334

Executive Pay for Performance 334

Other Incentives & Controls 337

Do Executive Incentives Matter? 338

Summary 342

Employee Stock Options 342

Executive Pay 342

Study Questions 343

References 343

Further Reading 344

Appendix (available online) 344

PART FOUR APPLICATIONS 347

CHAPTER 13 BENEFITS 349

Introduction 349

Wages vs. Benefits 349

Why Offer Benefits? 353

Cost Advantage 353

Value Advantage 354

Government Mandate 356

Implementation of Benefits 357

Improving Employee Sorting 357

Cafeteria Plans 358

Pensions 360

Paid Time Off 368

Summary 371

Study Questions 372

References 373

Further Reading 373

CHAPTER 14 ENTREPRENEURSHIP AND INTRAPRENEURSHIP 375

Introduction 375

Entrepreneurship 376

The Choice to become an Entrepreneur 377

Intrapreneurship 385

Internal Markets 386

Creativity vs. Control 388

Speed of Decision Making 390

Reducing Bureaucracy 390

Continuous Improvement 391

Summary 393

Study Questions 393

References 394

Further Reading 395

Appendix (available online) 395

CHAPTER 15 THE EMPLOYMENT RELATIONSHIP 397

Introduction 397

Employment as an Economic Transaction 397

Perfect Competition 397

Imperfect Competition 398

Complex Contracting 400

Summary 402

Communication between Management andWorkers 403

Communication from Management to Workers 403

Communication from Workers to Management 405

The Decision to Empower Workers 408

Improving Cooperation 414

From the Prisoner’s Dilemma to Employment 417

Reputation and the Employment Relationship 418

Investing in Reputation 419

Summary 425

Personnel Economics in Practice 425

Study Questions 427

References 428

Further Reading 428

Appendix (available online) 429

GLOSSARY 435

INDEX 445