Seminar in Personnel Economics
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- Clifton Fisher
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1 Seminar in Personnel Economics Job Design 1) Gibbs, Michael, Alec Levenson, and Cindy Zoghi. "Why are jobs designed the way they are?." Jobs, Training, and Worker Well-being. Emerald Group Publishing Limited, ) Kandel, Eugene, and Edward P. Lazear. "Peer pressure and partnerships." Journal of Political Economy (1992): Paying for Performance 3) Gibbs, Michael. "Incentive compensation in a corporate hierarchy." Journal of Accounting and Economics 19.2 (1995): ) Jensen, Michael C., and William H. Meckling. "Specific knowledge and divisional performance measurement." Journal of Applied Corporate Finance 21.2 (2009): ) Baker, George. "Distortion and risk in optimal incentive contracts." Journal of Human Resources (2002): ) Courty, Pascal, and Gerald Marschke. "A general test for distortions in performance measures." The Review of Economics and Statistics 90.3 (2008): ) Gibbs, Michael, Kenneth A. Merchant, Wim A. Van der Stede, and Mark E. Vargus. "Determinants and effects of subjectivity in incentives." The Accounting Review 79, no. 2 (2004): ) Prendergast, Canice. "The tenuous trade-off between risk and incentives." Journal of Political Economy (2002): ) Brickley, James A., and Jerold L. Zimmerman. "Changing incentives in a multitask environment: evidence from a top-tier business school." Journal of Corporate Finance 7.4 (2001): ) Tzioumis, Konstantinos, and Matthew Gee. "Nonlinear incentives and mortgage officers decisions." Journal of Financial Economics (2013):
2 11) Lazear, Edward P. "Salaries and piece rates." Journal of Business (1986): ) Gibbs, Michael. Design and implementation of pay for performance., Discussion Paper series, Forschungsinstitut zur Zukunft der Arbeit (2012): No ) Coupé, Tom, Valérie Smeets, and Frédéric Warzynski. "Incentives, sorting and productivity along the career: Evidence from a sample of top economists." Journal of Law, Economics, and Organization 22.1 (2006): ) De Varo, Jed. "Internal promotion competitions in firms." RAND Journal of Economics (2006): ) Baker, George P., and Brian J. Hall. "CEO incentives and firm size." Journal of Labor Economics 22.4 (2004): ) Hall, Brian J., and Kevin J. Murphy. "The trouble with stock options." The Journal of Economic Perspectives 17.3 (2003): Employee Benefits 17) Rajan, Raghuram G., and Julie Wulf. "Are perks purely managerial excess?." Journal of Financial Economics 79.1 (2006): ) Oyer, Paul. "Salary or benefits?." Work, Earnings and Other Aspects of the Employment Relation. Emerald Group Publishing Limited, Entrepreneurship 19) Backes-Gellner, Uschi, and Petra Moog. "The disposition to become an entrepreneur and the jacks-of-all-trades in social and human capital." The Journal of Socio- Economics 47 (2013): ) Kaplan, Steven N., and Per ER Strömberg. "Characteristics, contracts, and actions: Evidence from venture capitalist analyses." The Journal of Finance 59.5 (2004): ) Lazear, Edward P. "Balanced skills and entrepreneurship." The American Economic Review 94.2 (2004):
3 Abstracts: Job Design 1) Gibbs, Michael, Alec Levenson, and Cindy Zoghi. "Why are jobs designed the way they are?." Jobs, Training, and Worker Well-being. Emerald Group Publishing Limited, In this chapter we study job design. Do organizations plan precisely how the job is to be done ex ante, or ask workers to determine the process as they go? We first model this decision and predict complementarity among these following job attributes: multitasking, discretion, skills, and interdependence of tasks. We argue that characteristics of the firm and industry (e.g., product and technology, organizational change) can explain observed patterns and trends in job design. We then use novel data on these job attributes to examine these issues. As predicted, job designs tend to be coherent across these attributes within the same job. Job designs also tend to follow similar patterns across jobs in the same firm, and especially in the same establishment: when one job is optimized ex ante, others are more likely to be also. There is evidence that firms segregate different types of job designs across different establishments. At the industry level, both computer usage and R&D spending are related to job design decisions. 2) Kandel, Eugene, and Edward P. Lazear. "Peer pressure and partnerships." Journal of Political Economy (1992): Partnerships and profit sharing are often claimed to motivate workers by giving them a share of the pie. But in organizations of any significant size, the free rider effects would seem to choke off any motivational forces. This analysis explores how peer pressure operates and how factors such as profit sharing, shame, guilt, norms, mutual monitoring, and empathy interact to create incentives in the firm. The argument that Japanese firms enjoy team spirit because compensation is linked to overall profitability is analyzed. An explanation for the prevalence of partnerships among individuals in similar occupations is provided. Paying for Performance 3) Gibbs, Michael. "Incentive compensation in a corporate hierarchy." Journal of Accounting and Economics 19.2 (1995): A theoretical and empirical analysis of within job and promotion based incentives for middle managers is presented, using personnel data from a firm. Within job incentives are stronger than implied by previous studies. Evidence is provided that promotions sort employees by ability, and also generate incentives. Promotions are associated with large increases in lifetime earnings, as long as performance is sustained in the future. There is little evidence that the firm trades off within job and promotionbased incentives as predicted. Instead, it appears to use a simple incentive scheme, resulting in declining incentives for those passed over for promotion. 3
4 4) Jensen, Michael C., and William H. Meckling. "Specific knowledge and divisional performance measurement." Journal of Applied Corporate Finance 21.2 (2009): This paper discusses five common divisional performance measurement methods cost centers, revenue centers, profit centers, investment centers, and expense centers and provides the beginnings of a theory that attempts to explain when each of these five methods is likely to be the most efficient. The central insight of the theory is that each of these methods offers an alternative way of aligning decision making authority with valuable specific knowledge inside the organization. The theory suggests that cost and revenue centers work best in cases where headquarters has good information about cost and demand functions, product quality, and optimal output mix. Profit centers defined as business units whose managers have responsibility for overall profits, but not the authority to make major capital spending decisions tend to supplant revenue and cost centers when the line managers have a significant informational advantage over headquarters and when there are few interdependencies (or synergies ) between divisions. Investment centers that is, profit centers in which unit managers are allowed to make major investment decisions tend to prevail when the activity is capital intensive and when it is difficult for headquarters to identify the value maximizing investment strategy. In evaluating the performance of profit centers, rate of return performance measures like RONA (return on net assets) are likely to be effective when unit managers have little influence over the level of new investment. But, in the case of investment centers, Economic Value Added, or EVA, is likely to be the most effective single period measure of performance because it is best designed to encourage value maximizing investment decisions. 5) Baker, George. "Distortion and risk in optimal incentive contracts." Journal of Human Resources (2002): Performance measurement is an essential part of the design of any incentive system. The strength and value of incentives in organizations are strongly affected by the performance measures available. Yet, the characteristics of valuable performance measures have not been well explored in the agency literature. In this paper, I use a multitask model to develop a two parameter characterization of performance measures and show how these two parameters distortion and risk affect the value and use of performance measures in incentive contracts. I show that many complex issues in the design of real world incentive contracts can be fruitfully viewed as tradeoffs between these two features of performance measures. I also use this framework to analyze the provision of incentives in several specific environments, including R&D labs and nonprofit organizations. 6) Courty, Pascal, and Gerald Marschke. "A general test for distortions in performance measures." The Review of Economics and Statistics 90.3 (2008): Results from the incentive literature suggest that performance measures are often distorted, eliciting dysfunctional and unintended responses. The existence of these responses, however, is difficult to demonstrate in practice because this behavior is typically hidden from the researcher. We present a simple model showing that one can test for the existence of distortions by estimating the change in the association between a performance measure and the true goal of the organization with the measure s introduction. Using data from a public sector organization, we find evidence consistent with the existence of distortions. We draw implications for the selection of performance measures. 4
5 7) Gibbs, Michael, Kenneth A. Merchant, Wim A. Van der Stede, and Mark E. Vargus. "Determinants and effects of subjectivity in incentives." The Accounting Review 79, no. 2 (2004): This study examines two questions: When do firms make greater use of subjectivity in awarding bonuses? What are the effects of subjectivity on employee pay satisfaction and firm performance? We examine these questions using data from a sample of 526 department managers in 250 car dealerships. First, the findings suggest that subjective bonuses are used to complement perceived weaknesses in quantitative performance measures and to provide employees insurance against downside risk in their pay. Specifically, use of subjective bonuses is positively related to: (1) the extent of long term investments in intangibles; (2) the extent of organizational interdependencies; (3) the extent to which the achievability of the formula bonus target is both difficult and leads to significant consequences if not met; and (4) the presence of an operating loss. Second, we find that the effects of subjective bonuses on pay satisfaction, productivity, and profitability are larger the greater the manager's tenure, consistent with the idea that subjectivity improves incentive contracting when there is greater trust between the subordinate and supervisor. 8) Prendergast, Canice. "The tenuous trade-off between risk and incentives." Journal of Political Economy (2002): Empirical work testing for a negative trade off between risk and incentives has not had much success: the data suggest a positive relationship between measures of uncertainty and incentives rather than the posited negative trade off. I argue that the existing literature fails to account for an important effect of uncertainty on incentives through the allocation of responsibility to employees. When workers operate in certain settings, firms are content to assign tasks to workers and monitor their inputs. By contrast, when the situation is more uncertain, they delegate responsibility to workers but, to constrain their discretion, base compensation on observed output. 9) Brickley, James A., and Jerold L. Zimmerman. "Changing incentives in a multitask environment: evidence from a top-tier business school." Journal of Corporate Finance 7.4 (2001): This study focuses on changes in incentives at the William E. Simon Graduate School of Business Administration in the early 1990s to redirect effort from academic research to classroom teaching. We find a substantial and almost immediate jump in teaching ratings following the changes in incentives. Longer run learning and turnover effects are present. Evidence also suggests that research output fell. This case illustrates the power of organizational incentives to redirect effort in a multitask environment, even in the presence of apparent human capital constraints. 10) Tzioumis, Konstantinos, and Matthew Gee. "Nonlinear incentives and mortgage officers decisions." Journal of Financial Economics (2013): In the aftermath of the recent financial crisis, banks should ensure that their incentive compensation policies appropriately balance long term risk with short term rewards. Using daily output data from mortgage officers in a US commercial bank, we test the notion that nonlinear contracts create timevarying incentives for the employees and impose costs on the firm. We provide empirical evidence that mortgage officers greatly increase their output toward the end of each month, when the minimum monthly quota is assessed. This occurs through a combination of reducing the processing time and approving some marginal applications. We also find that mortgages originated on the last working day of the month have a higher likelihood of delinquency. 5
6 11) Lazear, Edward P. "Salaries and piece rates." Journal of Business (1986): Some workers receive compensation that is specified in advance and not directly contingent on performance. Instead, it depends on an input measure, such as hours worked. For others, compensation is directly related to output. This essay is an attempt to predict a firm's choice of compensation method. Piece rates are defined more rigorously. Among the more important factors discussed are worker heterogeneity, incentives, sorting considerations, monitoring costs, and asymmetric information. One result is that salary workers tend to be of lower quality and more homogeneous than are their piece rate counterparts. Numerous additional results are provided. 12) Gibbs, Michael. Design and implementation of pay for performance., Discussion Paper series, Forschungsinstitut zur Zukunft der Arbeit (2012): No A large, mature and robust economic literature on pay for performance now exists, which provides a useful framework for thinking about pay for performance systems. I use the lessons of the literature to discuss how to design and implement pay for performance in practice. 13) Coupé, Tom, Valérie Smeets, and Frédéric Warzynski. "Incentives, sorting and productivity along the career: Evidence from a sample of top economists." Journal of Law, Economics, and Organization 22.1 (2006): In this paper we study empirically the labor market of economists. We look at the mobility and promotion patterns of a sample of 1,000 top economists over thirty years and link it to their productivity and other personal characteristics. We find that the probability of promotion and of upward mobility is positively related to past production. However, the sensitivity of promotion and mobility to production diminishes with experience, indicating the presence of a learning process. We also find evidence that economists respond to incentives. They tend to exert more effort at the beginning of their career when dynamic incentives are important. This finding is robust to the introduction of tenure, which has an additional negative ex post impact on production. Our results indicate therefore that both promotions and tenure have an effect on the provision of incentives. Finally, we detect evidence of a sorting process, as the more productive individuals are allocated to the higher ranked universities. 14) De Varo, Jed. "Internal promotion competitions in firms." RAND Journal of Economics (2006): Using a sample of skilled workers from a cross section of establishments in four metropolitan areas of the United States, I present evidence suggesting that promotions are determined by relative worker performance. I then estimate a structural model of promotion tournaments (treating as endogenous promotions, worker performance, and the wage spread from promotion) that simultaneously accounts for worker and firm behavior and how the interaction of these behaviors gives rise to promotions. The results are consistent with the predictions of tournament theory that employers set wage spreads to induce optimal performance levels, and that workers are motivated by larger spreads. 6
7 15) Baker, George P., and Brian J. Hall. "CEO incentives and firm size." Journal of Labor Economics 22.4 (2004): We develop a model that clarifies how to measure CEO incentive strength and how to reconcile the enormous differences in pay sensitivities between executives in large and small firms. The crucial parameter is shown to be the elasticity of CEO productivity with respect to firm size. We find that CEO marginal products rise significantly with firm size (confirming Rosen s conjecture that CEOs of large firms have a chain letter effect on firm performance), and overall CEO incentives are roughly constant, or decline slightly, with firm size. We employ a multitask model to discuss implications for the design of control systems. 16) Hall, Brian J., and Kevin J. Murphy. "The trouble with stock options." The Journal of Economic Perspectives 17.3 (2003): The benefits of stock options are often not large enough to offset the inefficiency implied by the large divergence between the cost of options to companies and the value of options to risk averse, undiversified executives and employees. Moreover, the benefits of options can often be achieved more effectively and economically through other means. Why are options so prevalent? Several explanations include changes in corporate governance, reporting requirements, taxes, the bull market and managerial rent seeking. We offer an alternative hypothesis: boards and managers incorrectly perceive stock options to be inexpensive because options create no accounting charge and require no cash outlay. Employee Benefits 17) Rajan, Raghuram G., and Julie Wulf. "Are perks purely managerial excess?." Journal of Financial Economics 79.1 (2006): A widespread view is that executive perks exemplify agency problems they are a route through which managers misappropriate a firm's surplus. Accordingly, firms with high free cash flow, operating in industries with limited investment prospects, should offer more perks, and firms subject to more external monitoring should offer fewer perks. The evidence for agency as an explanation of perks is, at best, mixed. Perks are, however, offered in situations in which they enhance managerial productivity. While we cannot rule out the occasional aberration, and while we have little to say on the overall level of perks, our findings suggest that treating perks purely as managerial excess is incorrect. 18) Oyer, Paul. "Salary or benefits?." Work, Earnings and Other Aspects of the Employment Relation. Emerald Group Publishing Limited, Employer provided benefits are a large and growing share of compensation costs. In this paper, I consider three factors that can affect the value created by employer sponsored benefits. First, firms have a comparative advantage (e.g., due to scale economies or tax treatment) in purchasing relative to employees. This advantage can vary across firms based on size and other differences in cost structure. Second, employees differ in their valuations of benefits and it is costly for workers to match with firms that offer the benefits they value. Finally, some benefits can reduce the marginal cost to an employee of extra working time. I develop a simple model that integrates these factors. I then generate empirical implications of the model and use data from the National Longitudinal Survey of Youth to test these implications. I examine access to employer provided meals, child care, dental insurance, and health insurance. I also study how benefits are grouped 7
8 together and differences between benefits packages at for profit, not for profit, and government employers. The empirical analysis provides evidence consistent with all three factors in the model contributing to firms decisions about which benefits to offer. Entrepreneurship 19) Backes-Gellner, Uschi, and Petra Moog. "The disposition to become an entrepreneur and the jacks-of-all-trades in social and human capital." The Journal of Socio- Economics 47 (2013): This paper studies how an individual's composition of human and social capital affects his or her disposition to become an entrepreneur. Our theoretical analysis is an extension of Lazear's (2005) jack of all trades theory in combination with the idea of bricolage of experiences and their effectuation in the disposition to become an entrepreneur. Our primary conclusion is that it is not individuals with a higher level of human or social capital but rather individuals with a more balanced and combined portfolio of human capital, social capital and experiences that are more disposed than others to become entrepreneurs. We use survey data from a sample of more than 2000 German students to test this hypothesis and find that the jacks of all trades, i.e., individuals who are more balancing and combining different skills rather than specializing in a few, are more likely to become entrepreneurs. On the other hand, the masters of one, i.e., the specialists, are better off being employees and rightly prefer to do so. 20) Kaplan, Steven N., and Per ER Strömberg. "Characteristics, contracts, and actions: Evidence from venture capitalist analyses." The Journal of Finance 59.5 (2004): We study the investment analyses of 67 portfolio investments by 11 venture capital (VC) firms. VCs describe the strengths and risks of the investments as well as expected postinvestment actions. We classify the risks into three categories and relate them to the allocation of cash flow rights, contingencies, control rights, and liquidation rights between VCs and entrepreneurs. The risk results suggest that agency and hold up problems are important to contract design and monitoring, but that risk sharing is not. Greater VC control is associated with increased management intervention, while greater VC equity incentives are associated with increased valueadded support. 21) Lazear, Edward P. "Balanced skills and entrepreneurship." The American Economic Review 94.2 (2004):
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