What are the strategic implications of firm-specific incentives? Explaining human capital based competitive advantage*

Transcription

1 What are the strategic implications of firm-specific incentives? Explaining human capital based competitive advantage* Dissertation Summary David Kryscynski Goizueta Business School, Emory University 1300 Clifton Road NE Atlanta, Georgia USA Phone: (404) *This research is funded in part by the Ewing Marion Kauffman Foundation and by a grant from the Georgia Research Alliance in collaboration with the Kauffman Foundation. The contents of this research are solely the responsibility of David Kryscynski.

2 WHAT ARE THE STRATEGIC IMPLICATIONS OF FIRM-SPECIFIC INCENTIVES? Explaining Human Capital Based Competitive Advantage ABSTRACT This dissertation conceptually develops and theoretically explores the concept of firmspecific incentives i.e. incentives that employees perceive to be scarce outside of their current firms. I generally argue that firm level reliance on firm-specific incentives may help to explain how some firms are able to realize human capital based competitive advantage even when extant theory says that they should not. I discuss the duality of firm-specific incentives and firmspecific human capital and show how the latter fails to fully explain human capital based competitive advantage. Through four chapters I conceptually develop the construct and differentiate it from existing constructs in the organizational literature, empirically examine factors that should predict which firms will rely more on firm-specific incentives and, controlling for the endogeneity of incentive offerings, empirically test the performance implications of reliance on these incentives. I describe my empirical approach which includes a multi-level survey design sent to approximately 2600 firms in the software and IT industries and employee compensation data for a subset of these firms (n ~778). While data collection is ongoing, the current response set consists of over 170 companies with key informant surveys and approximately 30 companies in various stages of participation in employee level surveys.

3 FIRM-SPECIFIC INCENTIVES 3 INTRODUCTION This dissertation theoretically and empirically explores the strategic implications of firmspecific incentives i.e. incentives that workers perceive to be scarce outside of their focal firms. Just as firm-specific human capital describes worker knowledge, skills and abilities that create more value for the focal firm than for all other firms (Becker 1964), firm-specific incentives describe firm level sources of worker utility that create more value for workers in the focal firm than in all other firms. In other words, firm-specific human capital captures differences in how much and what kind of value workers create for their firms while firm-specific incentives capture differences in how much and what kind of value firms create for their workers. The core argument in this dissertation is that firm-level variance in firm-specific incentives may help explain how some firms can create human capital based competitive advantage, even when extant theory suggests that they should not. I begin by discussing the shortcomings of firm-specific human capital for explaining human capital based competitive advantage and then develop the firm-specific incentives construct in more detail. I then describe the contributions of the four dissertation chapters. Following these descriptions I outline my research design I construct a proprietary data set combining employee level compensation data from software and IT firms with researcher administered surveys both at the firm and individual levels of analysis. The overall research sample includes approximately 2600 firms, but compensation data is only available for approximately 778. WHY FIRM-SPECIFIC HUMAN CAPITAL FALLS SHORT Theory predicts that it should be very difficult to create and sustain human capital based competitive advantage because workers can choose to quit (Barney 1991, Coff 1997, Hall 1993) and/or to withhold effort (Gottschalg and Zollo 2007, Makadok 2003). Following Peteraf and

4 FIRM-SPECIFIC INCENTIVES 4 Barney (2003 p.314), a firm has competitive advantage if it is able to create more economic value than the marginal (breakeven) competitor in its product market. Accordingly, a firm has a human capital based competitive advantage if a portion of this above normal economic value is attributable to superior access to and/or utilization of employee knowledge, skills and abilities. Thus, creating and capturing above normal economic value through human capital requires increasing the gap between worker marginal products and the economic costs of keeping those workers in place (Brandenburger and Stuart 1996). Worker mobility and motivation problems threaten human capital based competitive advantage because a large portion of firms valuable knowledge and productive capabilities reside in the heads of employees (Felin and Hesterly 2007). These workers can bargain for higher wages and/or larger profit shares through credible threats to quit or withhold effort (Blair 1995, Coff 1999) i.e. they can demand wages 1 equivalent to their second best options. Wages at workers second best options are equivalent to the economic costs of retaining them. In highly competitive labor markets, the differences between workers first best and second best options go to zero and the economic costs of retaining workers is equivalent for all firms, which is also equivalent to workers marginal products. In other words, wages, economic costs of retaining workers and worker marginal products should be equal in competitive labor markets. When there is no gap between worker marginal products and economic costs, there is no economic value generated from human capital, and certainly no above normal value. We should only expect firms to create above normal economic value from human capital when there are labor market imperfections that allow some firms to create and/or leverage a gap between employee marginal products and the economic costs of keeping those employees in place. 1 Technically, workers can demand total utility equal to the total utility at their second best options. Wages is used here as a reasonable conceptual proxy for total utility.

5 FIRM-SPECIFIC INCENTIVES 5 One labor market imperfection often lauded by strategy scholars is firm-specific human capital i.e. worker knowledge, skills and abilities that are more valuable in the focal firm than in any other firm (Becker 1964). This difference in derived value between firms represents a labor market imperfection that focal firms can leverage they can offer wages higher than workers second best options in order to retain employees, but lower than their marginal products. This sweet spot compensation level represents a wage that allows the firms and the workers to share the returns from human capital (Becker 1964, Williamson 1975). Note that wage level in this case is higher than the costs of holding employees in place (Coff 1999). More importantly for the present argument, difference in skill value across firms highlights the importance of firm-specific human capital as a potential explanation for human capital based competitive advantages (Hatch and Dyer 2004, Kor and Leblebici 2005, Wang et al. 2009). Economic costs of retention are equal to workers marginal products in their second best options. Marginal products at workers second best options are lower than marginal products in the focal firm, so there is a gap between marginal products and costs of retention. The larger this gap, the greater a firm s human capital based competitive advantage. Firm-specific human capital fails to fully explain why some firms can realize human capital based competitive advantage, however, for at least two reasons. First, there is reason to suspect that workers with firm-specific human capital may be more mobile than is often assumed by strategy scholars. In a working manuscript, Campbell, Coff and Kryscynski (2010) argue that the immobility of workers with firm-specific human capital is overstated because traditional models fail to capture the effects of imperfect information, the duality and co-development of general and firm-specific human capital, and heterogeneity in how firms value different kinds of general human capital. In other words, they argue that outside options for employees with firm-

6 FIRM-SPECIFIC INCENTIVES 6 specific human capital may be better than often considered and, accordingly, the economic costs of retaining these employees are likely higher than often assumed. The second reason that reliance on firm-specific human capital fails to fully explain human capital based competitive advantage is that we lack a compelling argument for why workers may be more motivated to exert effort when they possess firm-specific human capital. This is concerning because simply retaining workers does not ensure that they contribute appropriately to value creation (Gottschalg and Zollo 2007, Makadok 2003). Since it may no longer be reasonable to assume that firms are homogeneous in their abilities to motivate their workers (Gottschalg and Zollo 2007), we must also explore motivation-based explanations for heterogeneity in creating and capturing economic value through human capital. Unfortunately, there is a paucity of research explicitly connecting firm-specific human capital to systematic differences in firm-level worker motivation and subsequent performance outcomes. The small stream of research that does explore the connection between firm-specific human capital and worker motivation actually predicts a motivational problem, rather than a solution. Wang and Barney (2006) describe the inherent paradox with firm-specific human capital firms rely on worker firm-specific investments for competitive advantage, but workers prefer not to make them. Specifically, employee investments in firm-specific human capital leave them open to the classic hold-up problem (Williamson 1975) i.e. once they make the investments the firm can act opportunistically and not fully compensate them. Workers should prefer not to make these investments without appropriate contractual assurances of adequate compensation and/or up-front compensation. Thus, rather than solving a motivational problem, it appears that emphasizing firm-specific human capital may actually create a motivational problem i.e. the problem of motivating workers to make these investments in the first place.

7 FIRM-SPECIFIC INCENTIVES 7 THE STRATEGIC IMPORTANCE OF FIRM-SPECIFIC INCENTIVES Given the concerns with relying on firm-specific human capital as the prevailing explanation for how some firms can create human capital based competitive advantage, it seems appropriate to shift research attention to other sources of labor market imperfections that firms can leverage in their efforts to create competitive advantages. This dissertation argues that firm-specific incentives may be one such imperfection. Rather than exploring the specificity of workers skills, which constrain mobility due to lower skill value at outside options regardless of workers desires to quit, I explore the specificity of incentives, which constrain mobility by reducing workers desires to quit or lose their jobs regardless of the external value of their skills. Broadly defined, incentives are any aspects of the employment relationship valued by workers, regardless of whether those aspects are directly or indirectly bestowed, created, or tied to individual membership, effort or performance. Defined in this way, incentives are any aspects of the employment relationship that influence employee behaviors, a conceptualization much broader than the sometimes narrow focus on pecuniary and high-powered incentives. Thus, rewards (Kerr 1975, 1999), benefits, inducements (Barnard 1938, Coyle-Shapiro and Conway 2005), high-powered incentives and compensation (Gerhart and Rynes 2003) are all forms of incentives. Firm-specificity of incentives is defined as the extent to which employees perceive that comparable 2 incentives are unavailable at rival firms. Firm-specificity is ultimately a continuum with ends anchored by purely firm-specific and purely general incentives i.e. those that employees perceive to be readily available in the labor market. Defined in this way, firmspecificity of incentives parallels firm-specificity of human capital i.e. purely firm-specific human capital is only valuable to the current firm while general human capital is widely valued 2 The idea of comparable incentives captures the extent to which employees are likely to view incentives as similar in different firms. For example, working relationships in two different firms may be comparable, but they are certainly not identical.

8 FIRM-SPECIFIC INCENTIVES 8 in the labor market (Becker 1993{1964}). Likewise, purely firm-specific incentives are only available in the current firm while general incentives are readily available elsewhere. Some illustrative examples of firm-specific incentives are shown below in table 1. [INSERT TABLE 1 ABOUT HERE] While many incentive categorizations exist in the organizational literature, such as extrinsic and intrinsic (Deci et al. 1999, Gottschalg and Zollo 2007), social and non-social (Sauermann and Cohen 2008), pecuniary and non-pecuniary (Akerlof and Kranton 2000, 2005, Fehr and Falk 2002), powerful and weak, and so forth, these categorizations are used primarily to describe individual level motivations and outcomes independent of labor market conditions. In other words, scholars utilizing these categorizations tend to focus on how the levels of these incentives affect individual level outcomes e.g. as non-pecuniary incentives increase, worker creative effort increases (Sauermann and Cohen 2008). When our focus shifts to firm-level heterogeneity in worker outcomes rather than individual level heterogeneity, our treatment of incentives may also need to shift. Specifically, explaining firm-level heterogeneity in worker quit rates may be better explained by relative rather than absolute incentive levels i.e. workers should care more about the total utility available at their next best option in comparison to their current situation, rather than the absolute level of their current total utility (Rosen 1986). The problem with simply analyzing relative incentives across firms, however, is that incentives ultimately operate at the level of the individual worker, and workers may not be able to fully evaluate the incentives available in their current and outside options (Simon 1945). At any given time, these workers should rely more on their perceptions of incentive options rather than true assessments of these options. Certain incentives may seem unavailable outside of focal firms for a number of reasons including: (1) they may actually be scarce, (2) there may be

9 FIRM-SPECIFIC INCENTIVES 9 contractual restrictions that make receiving the incentives contingent upon continued membership, (3) some incentives may be very hard to see and evaluate ex ante, like experience goods and (4) some incentives may become more valuable to individuals over time. Also, since firm-specificity of incentives relies on employee perceptions of incentive scarcity, incentives in any of the previously mentioned incentive categories may vary in firmspecificity. One illustrative example is the value academicians derive from their co-author relationships. The value of these relationships may be categorized as intrinsic, social, nonpecuniary and intangible. However, co-author relationships may transcend institutional affiliations. These relationships may provide incentive to remain in the profession, but may not provide incentive to remain at any particular institution. In contrast, relationships that rely on physical proximity, such as regular meetings with a think tank of experts, may provide institution-specific incentives to stay. Thus, depending on conditions, relationships could be categorized as highly firm-specific or quite general. Additional illustrative examples are shown in table 1. While firm-specific incentives may help to explain heterogeneity in firm-level worker motivation and quit rates, they can only help explain above normal economic value creation if they facilitate lower economic costs than rivals holding outputs constant, higher outputs than rivals holding economic costs constant, or both lower economic costs and higher outputs than rivals (Brandenburger and Stuart 1996). There are at least two theoretical reasons to expect that firm-specific incentives may satisfy these conditions. First, if a firm can offer firm-specific incentives worth a single unit of employee utility at less than what it costs rivals to offer a unit of utility, then that firm has a cost advantage relative to rivals. Assuming no difference between the incentive effects of firm-specific versus general incentives, this cost advantage allows the firm to

10 FIRM-SPECIFIC INCENTIVES 10 achieve equivalent outcomes at a discount. There is reason to believe that certain intangible incentives such as interpersonal relationships (Dutton and Ragins 2007, Kahn 2007) or the opportunity to make a difference (Sauermann and Cohen 2008) may be both highly firm-specific and almost costless to maintain. If true, these kinds of firm-specific incentives may allow firms to offer differentiated incentives at low costs relative to rivals. Second, there may actually be important differences in incentive effects for firm-specific and general incentives, especially for incentives that are highly firm-specific due to the experience goods problem i.e. they are hard to see and evaluate ex-ante. These kinds of incentives become more valuable to employees over time as they become socialized to organizational norms and values, and as they become more socially embedded in their organizations. Many of these incentives, such as confidence in company leadership, positive co-worker relationships, appreciation for the organizational mission, and so forth, not only increase in value over time, but may also increase worker affective commitment to the organization (Mathieu and Zajac 1990, Meyer et al. 2002). Higher commitment generally leads to higher levels of individual motivation over a diffuse set of desirable behaviors rather than a specific and measurable set of behaviors (Mathieu and Zajac 1990, Meyer et al. 2004, 2002). In contrast, general incentives should not have the same effects because workers perceive that they are readily available elsewhere and, therefore, see the firm as replaceable rather than forming an affective bond. If true, these firm-specific incentives may facilitate higher sustained levels of employee motivation and lead to some firms creating more output than rivals for similar economic costs. Given the potential for firm-specific incentives to explain human capital based competitive advantage, it is perplexing that scholarly research has neglected these kinds of incentives. Other than Coff s (1997) early mentioning of firm-specific forms of compensation as one potential tool

11 FIRM-SPECIFIC INCENTIVES 11 to address human capital hazards, I am unaware of research articulating this possibility. In fact, with the exception of a handful of studies exploring incentives for high level executives (e.g. Mackey 2008), strategy scholars have almost completely ignored the importance of incentives as a potential source of advantage. Most strategic incentive research follows the embedded assumptions of the strategy implementation literature i.e. incentives are tools to achieve higher internal efficiency through fit with organizational contingencies (Galbraith 1977, Galbraith and Kazanjian 1986b, a). Based on this assumption, firms simply select the optimal incentive system given their specific situations and maximize internal efficiency accordingly (e.g.balkin and Gomez-Mejia 1987, 1990). Better fit may lead to better efficiency, but if all firms select the optimal incentive systems for their contingencies, then these systems provide no advantage. It seems necessary to challenge this embedded assumption by examining incentives that are inherently firm-specific, and the associated subsequent firm-level outcomes. DISSERTATION OVERVIEW This dissertation theoretically and empirically explores the strategic implications of firmspecific incentives through four independent chapters that each rely on firm-specific incentives as the central construct. The first chapter conceptually develops the construct in greater detail and directly addresses four specific research questions: (1) What are firm-specific incentives? (2) What factors drive perceptions of incentive scarcity? (3) How are firm-specific incentives distinct from other constructs in the organizational literature? And (4) what are the theoretical implications of firm-specific incentives? I develop several high level propositions suggesting that firms with the ability to leverage valuable firm-specific incentives should achieve performance advantages. The primary contribution of this chapter is the theoretical development

12 FIRM-SPECIFIC INCENTIVES 12 of this unexplored construct. This chapter lays the theoretical groundwork that guides the three empirical chapters to follow. One of the main empirical contributions is the development and execution of a novel measure for firm-specific incentives in a proprietary data set described in more detail in the research design section below. The three remaining chapters use this novel measure and these proprietary data to empirically explore firm-specific incentives. While the ultimate objective of the dissertation is to examine performance outcomes, the second and third chapters acknowledge that incentive systems are not randomly assigned to firms. Specifically, the second chapter embraces the possibility that external factors can constrain a firm s ability to offer certain incentives through the following research question: does firm size affect a firm s ability to offer firm-specific incentives? I generally argue that smaller firms are better able to offer firmspecific incentives because of their reduced bureaucratic constraints (Cardon and Stevens 2004, Rousseau et al. 2006, Zenger 1994). These reduced constraints facilitate greater flexibility in offering customized incentive bundles which should enhance employee perceptions of incentive scarcity. One of the primary contributions of this chapter is a rich empirical test of incentive differences between large and small firms that includes measures of incentives often assumed to be important in small firms, but rarely measured (Cardon and Stevens 2004). The third chapter embraces the likelihood that some firms strategically choose their incentives based on organizational contingencies (Balkin and Gomez-Mejia 1987, Galbraith and Kazanjian 1986b) through the following research question: do knowledge intensive firms and firms that rely more on firm-specific human capital also rely more on firm-specific incentives? I generally argue that higher knowledge intensity and higher reliance on firm-specific human capital will predict higher reliance on firm-specific incentives because these incentives enhance

13 FIRM-SPECIFIC INCENTIVES 13 retention. Firms that rely on knowledge intensity and firm-specific human capital are more likely to benefit from higher employee tenure and lower voluntary exits (Lepak and Snell 1999, 2002). Controlling for size, I empirically test the effects of knowledge intensity and reliance on firm-specific human capital on firms reliance on firm-specific incentives. One of the primary contributions of this chapter is an empirical exploration of firm-specific human capital and firmspecific incentives simultaneously. The fourth chapter empirically tests the strategic implications of firm-specific incentives through the following research question: controlling for the endogeneity of incentive offerings explored in chapters two and three, do firms that offer firm-specific incentives have performance advantages? I argue that higher use of firm-specific incentives will lead to lower dysfunctional turnover because employees will prefer not to sacrifice these incentives, lower wage-tenure slopes because firms with these incentives can slowly offer lower than market wage increases as worker tenure increases, and higher labor productivities because employees will be more motivated to exert extra effort in these firms. A visual depiction of the overall framework for the empirical chapters is shown in figure 1 below. [INSERT FIGURE 1 ABOUT HERE] RESEARCH DESIGN While my predictions focus on the firm as the primary level of analysis, incentives actually operate at the level of the individual worker. To some degree it does not matter what incentives the firm actually offers as much as what incentives workers perceive are available 3. This conceptual point has empirical implications because it suggests that ideal measures of firmlevel incentives must come from bottom-up aggregations of employee level perceptions. Thus, 3 Support for the importance of employee perceptions comes from the psychological contracts literature where scholars argue that actual levels of certain incentives are not as important as the extent to which employees perceive that they are receiving what they were promised and/or entitled to (Rousseau 1995)

14 FIRM-SPECIFIC INCENTIVES 14 ideal data for these analyses would come from all employees within a knowledge intensive industry, where employees are critical resources for competitive advantage. These employees would provide their own perceptions of the incentives available to them from their firms and their preferences for those incentives. Additionally, these data would provide some indication of employee type and the strategic importance of each type to company performance 4. Practical restrictions make constructing a data set like that described above extremely difficult, so I propose constructing an imperfect approximation of the ideal. Specifically, I focus on a subset of firms in the software and IT industries from two industrial lists. The first list is the list of software companies from Hoovers Online (n~ 2277) and the second list is a set of software and IT firms that participate in the Culpepper and Associates, Inc. yearly compensation surveys (n~778). Due to overlap between the two lists the overall sample reduces to approximately 2600 software and IT firms. Culpepper and Associates, Inc. (hereafter Culpepper) is a small market research firm specializing in compensation surveys for the life sciences and high technology industries. Culpepper collects yearly employee level financial compensation data for every employee 5 from every company in the sample. Additionally, I focus narrowly on incentives available to software development professionals in these firms. Based on my exploratory research and interviews with executives in the software industry, these professionals lie at the heart of the competitive resources of software firms. Thus, these companies should be highly interested in motivating and retaining talented software developers. The focus on software developers allows meaningful comparisons across organizations in the sample this focus limits the potential noise associated with 4 Employee type is important because firms likely use different HR policies, practices and incentives for different employees with different levels of strategic importance (Lepak and Snell 1999, 2002). 5 Culpepper expects companies to provide employee level compensation data for every employee, but I am unsure of the reliability of the every employee statement. I will perform several cross checks to ensure that Culpepper actually receives compensation data for every or at least most employees in every firm.

15 FIRM-SPECIFIC INCENTIVES 15 including employees from different employment modes. I survey both key informants and software developers in each firm. Data Sources Culpepper and Associates, Inc. Compensation Surveys - The Culpepper surveys provide the key data for measures of financial incentives. Culpepper collects annual employee level data from participating companies. Data includes: date of hire, base salary, targeted bonus, cash allowances, prior year base salary, prior year bonus and prior year cash allowances. Some firms also provide information on employee retirement accounts and stock options. Hoovers Online Hoover s Online is a Dun and Bradstreet company that provides industrial information for over 65 million corporations. The companies in the Hoovers sample do not provide detailed compensation information, but they allow a comparison between companies that do and do not participate in the Culpepper surveys to check for sample bias. Researcher Administered Surveys The Culpepper surveys provide rich compensation data for employees within the organization, but do not provide any measures or approximations for non-monetary incentives or any details on firm strategies and/or reliance on human capital. To supplement the Culpepper data I administer both key informant and software developer surveys in each of the ~2600 companies in the sample. The key informant survey targets the highest ranking human resources official in the organization i.e. the person who should have the highest level knowledge about the overall incentives an organization offers to software developers. The data collection methodology follows a slightly modified version of the procedure described by Gupta, Shaw and Delery (2000) and used by these authors in several studies (e.g. Shaw et al. 2002, 2005, 1998). I obtained contact information for a contact in each company from Culpepper, from the Hoovers Online database or from the Lexis Nexus executive contact

16 FIRM-SPECIFIC INCENTIVES 16 database. In some cases, this contact is also the key informant, but in other cases the ideal key informant will be a higher ranking individual in the organization. First, I send a personalized announcement informing contacts that they will receive a call from the study team 6 for help to identify the key informant, a high ranking HR official. Second, a member of my study team calls the contact, describes the study and asks for a referral to the ideal key informant in the organization. If the contact is also the key informant then we directly invite the individual to participate and send the surveys. If the contact is not the key informant, then we ask for the contact information of the key informant and then call him/her directly. Third, we send personalized study invitation s to the key informants with links to the web based surveys. The key informants have two responsibilities in this stage: (1) completing the KI survey and (2) administering the software developer surveys. To administer the software developer surveys the key informant can either forward an embedded survey link to developers or enter the addresses of developers into a spreadsheet and it back to the study team. Fourth, we send a reminder a week after the invitation . Fifth, we call the key informant a week after the reminder to answer any questions and encourage participation. We then send two additional reminder s one week apart and a final paper letter. Measures Where relevant, I utilize measures commonly used in the organizational literature. Because of the newness of firm-specific incentives to the organizational literature, however, I develop a new measure for this critical construct. Firm-specificity of incentives is ultimately a firm-level construct that indicates the extent to which the firm relies on valued incentives that are highly firm-specific. Thus, I need to know which incentives a firm offers, the extent to which 6 The study team consists of myself and a team or research assistants hired to help administer the study.

17 FIRM-SPECIFIC INCENTIVES 17 developers perceive these incentives to be scarce in the labor market, and how valuable those incentives are to developers. To make measurement manageable, I provide a list of incentives and ask respondents to rate those incentives in various ways. To develop the list, I started with the measures commonly used in psychological contracts research 7 (e.g. Coyle-Shapiro and Conway 2005). I then added and deleted several items based on my exploratory interviews with executives. I also provide ten blank spaces for participants to write-in any incentives that may be unique to their organizations. The final list, consisting of 28 incentives, is available upon request. A detailed plan for how actual measures will be constructed from the data is also available upon request. Another important measure for the present research is the firm-level wage premium. To develop a measure of the extent to which each firm over or under-pays employees I utilize the Culpepper compensation data for software development professionals (n ~100,000) to construct an individual level wage equation. I regress wages on all observable individual characteristics in the Culpepper data: job function, job sub-function, job family, job level, organizational tenure, and geographic location. For a subset of employees I can also construct a proxy for quality based on prior year bonus and raise amounts. The resulting regression explains over 65% of the variance in individual wages across firms in the sample. I then use the employee s predicted wage to calculate an individual level wage premium i.e. the amount by which the employee is over or under-paid relative to predicted wage as a percentage of predicted wage. I then aggregate these individual level wage premium values to the firm level to create a firm level measure of the extent to which the company over or under-pays all employees, controlling for all observable individual level predictors of wage. The ability to measure financial compensation 7 The psychological contracts measure attempts to synthesize decades of organizational behavior research to focus on a subset of incentives that, together, are highly important for employee decisions to join, stay and exert effort.

18 FIRM-SPECIFIC INCENTIVES 18 simultaneously with non-monetary incentive measures is rare in the organizational literature (Gerhart and Rynes 2003) and illustrates one of the strengths of the present research effort. Data Collection Progress Data collection for the Culpepper sample (n~778) concludes at the end of September of As of September 28, 2010 over 170 companies have participated in the key informant survey for a current response rate of ~21.9%. Of those 170 companies, approximately 30 have expressed interest and willingness to participate in the software developer survey. The developer surveys are rolled out to companies as they receive the necessary clearance and approval for internal distribution. Results based on these data will be available by November of Data collection for the Hoovers sample (n ~1800 unique companies) will begin in October 2010 and conclude in December of Similar response rates to the Culpepper sample will yield an additional ~350 key informant responses and an additional ~60 companies willing to participate in the developer survey. CONCLUSION This dissertation makes several important contributions to the strategy literature. First, by articulating the conceptual importance of firm-specific incentives I show how some firms may be able to realize human capital based competitive advantage, even when extant theory suggests they should not. Second, I build a novel and proprietary data set that allows rich analysis both at the individual and firm levels of analysis. While prior studies have either accessed rich compensation data or rich non-financial incentives data, I am aware of no other study able to assemble a data set with both for such a large number of firms at both levels of analysis.

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23 FIRM-SPECIFIC INCENTIVES 23 Table 1: Illustrative Examples of Firm-Specific Incentives Incentive Powerful? Pecuniary? Extrinsic? Social? Firm- Specificity Specific praise and recognition YES NO YES? HIGH from CEO Specific praise and recognition YES NO YES? LOW from professional association Intrinsic value from professional NO NO NO? LOW job characteristics Intrinsic value from working on NO NO NO? HIGH proprietary technology Market level financial NO YES YES NO LOW compensation Financial compensation through NO YES YES NO HIGH pension program with increasing returns to tenure Tuition discounts with vesting NO YES YES NO HIGH Tuition reimbursements NO YES YES NO LOW Positive relationships with colocated NO NO? YES HIGH workers Positive relationships with NO NO? YES LOW professional colleagues Highest sales commission rate in YES YES YES NO HIGH the industry Average sales commission rate for the industry YES YES YES NO LOW

24 FIRM-SPECIFIC INCENTIVES 24 Figure 1: Visual Overview of Empirical Chapters External Constraints: Chapter 2 Firm Size Strategic Choices: Chapter 3 Knowledge Intensity Central Construct Firm-Specificity of Incentives Empirical Implications: Chapter 4 Wage/Tenure slope Dysfunctional Turnover Rate Labor Productivity Reliance on FS Human Capital