Picking from the top or shedding the bottom? Personnel management, worker quality and firm productivity Christopher M. Cornwell Ian M. Schmutte Daniela Scur Department of Economics Department of Economics MIT Sloan University of Georgia University of Georgia School of Management December 13 14, 2018 Empirical Management Conference Harvard Business School
Our Starting Point Distinguish management as a tool for: improved efficiency (size of the pie) improved rent capture (split of the pie) Considerable dispersion across firms in Productivity: [Hsieh and Klenow 2009; Bloom et al. (2012)] Compensation: [Card et al. (2013); Song et al. (2015); Alvarez, Benguria, Engbom, Moser (2018); Lavetti and Schmutte (2018)] Workforce Composition: [Iranzo et al. 2005; Abowd et al. (2006)] 1
Motivation Scant evidence on connection between management and pay, hiring, and firing: How do firms assemble the workforce? Value of firm recruiting and retention practices [(Oyer and Schaefer 2011)] This paper: Relative importance of management practices for recruiting (picking the best) retention (shedding the rest) 2
Overview: Data from Brazil We link three data sources Linked employer-employee data: Relação Anual de Informações Sociais (RAIS)2003 2013 Management practices: World Management Survey (WMS) 2008, 2013 Firm productivity data: Pesquisa Industrial Anual (PIA) 2003 2013 3
Our Approach 1. Identify managers and production workers in RAIS 2. Estimate, and rank managers and prod. workers by, AKM person effects 3. Document relationship between management structure, worker selection, and productivity 4. Describe movements of workers into and out of poorly- and well-managed firms 4
Related Productivity Dispersion and Management [Bloom et al. (2012),Boyd and Curtis (2014)] Team Production and Substitution [Jäger (2016),Hensvik and Rosenqvist (forthcoming),gallen (2018)] Sorting and Matching [Abowd et al. (1999), Card et al. (2013), Sorkin (2017), Lavetti and Schmutte (2018)] Direct Evidence on Management and Matching [Bandiera, Guiso, Prat and Sadun (2015), Bender, Bloom, Card, Reenen and Wolter (2016)] 5
Overview: Results 1. Worker and manager quality are positively correlated with TFP. 2. Better managed firms capture a higher share of total employment over time. 3. Positive recruitment: better managed firms hire a larger share of their new recruits from the top of the distribution of worker fixed effects. 4. Worker matching and retention: better managed firms fire less often and are more selectively. 5. Promotion and retention practices show the strongest correlation with production worker quality. 6
Data
RAIS (Relação Anual de Informações Sociais): 2003-2013 Collected from employers to administer social security payments Population: formal-sector jobs ( 50 million per year) Includes information on worker characteristics: education, experience, race, sex... job characteristics: occupation, wage, hours, tenure,... reason for separation, date of hire employer characteristics: industry, legal structure, size, location... We use RAIS under an agreement with the Brazilian Ministry of Labor and Employment. 7
Measurement of Worker Quality Manager quality : θ Mngr Prod. worker quality : θ Prod y it = α + x it β + θ i + ψ J(i,t) + ε it. y it log monthly wage of worker i at time t θ i worker effect ψ J(i,t) firm-specific contribution to pay 8
Distribution of Manager and Non-Manager Quality Density 0.5 1 1.5 Production workers Managers -2 0 2 4 AKM worker fixed effect 9
World Management Survey: 2008, 2013 Survey of management practices operations, performance, target-setting practices personnel practices 18 indicators with ordinal scores Score of 1: ( little/no formal management practices ) Score of 2 ( some informal management practices ) Score of 3: ( formal practices with some weaknesses ) Score of 4: ( established formal practices ) Score of 5: ( best practices, part of the culture of org ) We classify firms based on the methodological cutpoint score 3 informal practices firms (below 3) formal practices firms (above 3) 10
Distribution of Management Scores Distribution of management WMS data, Brazil Density 0.4.8 1 2 3 4 5 Management score (histogram: overall management index; k-density curve: people management index) Note: The data in this graph is from the World Management Survey for Brazil and covers 675 firms interviewe in 2008 or 2013. The histogram is of overall average management scores and the density curve is of people management scores only. 11
Compensation Practices, Management Quality, and Employment Outcomes Component Correlations Variables Mean Std. Dev. Management ˆψ ˆθ Management (z-score) 0 1 1.000 Firm effect: ˆψ 0 1 0.439 1.000 Worker effect: ˆθ 0 1 0.392 0.603 1.000 Firm size (employment) 583 787 0.325 0.219 0.267 Share of employees with college degree 0.12 0.16 0.325 0.500 0.873 Hire rate 0.19 0.14-0.054-0.193-0.154 Separation rate 0.22 0.13-0.177-0.251-0.258 Average tenure (months) 59.30 30.25 0.113 0.338 0.293 Average hours worked (week) 43.56 1.32-0.070-0.273-0.287 Share of white workers 0.69 0.28 0.026 0.124 0.277 Share of male workers 0.72 0.22 0.101 0.243-0.013 Share of unionized workers (non-managers) 0.56 0.40-0.108-0.123-0.099 12
PIA - Pesquisa Industrial Anual Industrial Survey of Manufacturing Establishments Design More than 30 Employees: Census 5-30 Employees: Random sample Information Longitudinal tracking Balance sheet Other economic variables 13
Findings
1. Consistent with the literature, worker and manager quality are positively correlated with TFP. 2. Better managed firms capture a higher share of total employment over time. 3. Positive recruitment: better managed firms hire a larger share of their new recruits from the top of the distribution of worker fixed effects. 4. Better worker matching and retention from lower separation rates. 5. Promotion and retention practices show the strongest correlation with production worker quality. 14
R1: More Productive Firms Use Higher Quality Workers Productivity log of value added per employee 9.5 10 10.5 11 11.5 12-2 -1 0 1 2 3 Average employee fixed effect (standardized) Overall PE Management PE Prod worker PE Tech worker PE Note: productivity data from PIA, worker data from RAIS, management data from WMS. Raw data. N=108607. Both variables residualized by regressing the underlying variable on log employment. Binscatter by vingtiles of overall mean person effects. 15
R1: More Productive Firms Use Higher-Quality Workers (1) (2) (3) (4) ln(sales) ln(sales) ln(sales) ln(sales) z-management 0.088*** 0.065*** 0.064*** 0.059*** (0.02) (0.01) (0.01) (0.01) Z-Avg person effect 0.076*** (0.02) Z-Avg prod worker effect 0.031** 0.028* 0.010 (0.02) (0.02) (0.02) Z-Avg manager effect 0.078*** 0.076*** 0.053*** (0.02) (0.02) (0.02) Share workers with college degree 0.05 0.05 (0.10) (0.10) Z-Avg firm effect 0.098*** (0.02) Family-owned -0.077** -0.099*** -0.098*** -0.098*** (0.04) (0.03) (0.03) (0.03) Founder-owned -0.030-0.068* -0.068* -0.050 (0.04) (0.04) (0.04) (0.04) # Observations 773 663 663 663 # Firms 679 594 594 594 R 2 0.96 0.97 0.97 0.97 Controls include: industry, log of capital, raw materials, and the number of employees. 16
R2: Better-Managed Firms Capture Larger Share of the Workforce Bottom tercile Middle tercile Top tercile Employment share.25.3.35.4 financial crisis year financial crisis year financial crisis year 2003 2008 20132003 2008 20132003 2008 2013 Year 17
R3: Firms with Formal Management Practices Hire Better Workers Informal processes Panel B: Hiring shares Formal processes Share 0.5 1 financial crisis year high ability low ability financial crisis year high ability low ability 2003 2005 2007 2009 2011 2013 2003 2005 2007 2009 2011 2013 18
R3: Firms with Formal Management Practices Retain Better Workers Informal processes Formal processes Employment stock share (annual) 0.5 1 financial crisis year high ability low ability financial crisis year high ability low ability 2003 2005 2007 2009 2011 2013 2003 2005 2007 2009 2011 2013 19
R4: Firms with Formal Management Practices Match and Fire More Selectively Managers Production workers Firing rate.05.1.15.2 Informal proccesses Formal processes -1 0 1 2 AKM person fixed effects Firing rate.05.1.15.2 Informal proccesses Formal processes -1 0 1 2 AKM person fixed effects 20
R5: Selectivity is Driven by People Management (1) (2) (3) (4) (5) (6) z-pe FE z-pe FE z-pe mgr FE z-pe mgr FE z-pe labr FE z-pe labr FE z-operations 0.131*** 0.034 0.252*** 0.137*** 0.090** 0.004 (0.042) (0.040) (0.041) (0.040) (0.044) (0.043) z-people 0.079* 0.091** -0.005 0.007 0.085* 0.098** (0.040) (0.038) (0.037) (0.035) (0.044) (0.042) Firm controls No Yes No Yes No Yes Industry controls Yes Yes Yes Yes Yes Yes # Observations 955 955 955 955 955 955 # Firms 690 690 690 690 690 690 R 2 0.249 0.324 0.267 0.360 0.217 0.273 21
R5: Selectivity is Driven by Talent Management (1) (2) (3) (4) (5) (6) Avg. wrkr FE Avg. wrkr FE Avg. mngr FE Avg. mngr FE Avg. prod. FE Avg. prod. FE Talent Mindset 0.071** 0.086*** 0.040 0.059* 0.078** 0.091** (0.035) (0.033) (0.035) (0.031) (0.038) (0.036) Perf. Culture 0.053 0.022 0.045 0.008 0.042 0.016 (0.033) (0.032) (0.034) (0.032) (0.034) (0.033) Talent Capacity -0.024-0.014-0.029-0.018-0.037-0.027 (0.032) (0.031) (0.034) (0.032) (0.033) (0.033) Talent Devel. -0.002 0.018-0.031-0.013 0.012 0.032 (0.039) (0.037) (0.038) (0.035) (0.043) (0.041) Value Prop. 0.049 0.018 0.019-0.015 0.043 0.016 (0.036) (0.034) (0.041) (0.037) (0.037) (0.036) Retaining Talent -0.021 0.007-0.040-0.009-0.007 0.017 (0.036) (0.036) (0.033) (0.033) (0.038) (0.038) Firm controls No Yes No Yes No Yes Industry controls Yes Yes Yes Yes Yes Yes # Observations 955 955 955 955 955 955 # Firms 690 690 690 690 690 690 R 2 0.255 0.327 0.272 0.362 0.223 0.277 22
Conclusions Motivation: There is scant evidence thus far on whether personnel management structures actually translate into real differences in pay, hiring and firing practices. We document these base relationships as a first step in a broader agenda. We identify managers and production workers using occupation codes, and estimate AKM person effects for each type of worker. We rank workers by their AKM person effects and identify the distribution of the ranked person effects of workers in poorly- and well-managed firms. We document the relationship between management structures and pay, worker selection (production and managers) and productivity. We document the flow of different worker types across poorly- and well-managed firms. 23
Thank you! Ian M. Schmutte schmutte@uga.edu 23
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