Personnel Economics in Practice

ABOUT THE AUTHORS iii PREFACE v ACKNOWLEDGMENTS ix PART ONE SORTING AND INVESTING IN EMPLOYEES 1 CHAPTER 1 SETTING HIRING STANDARDS 3 An Example: Hiring RiskyWorkers 3 New Hires as Options 3 Analysis 5 A Counterargument 7 Setting Hiring Standards 9 Balancing Benefits Against Costs 9 Foreign Competition 11 The Method of Production 12 How Many Workers to Hire? 15 Other Factors 16 Making Decisions with Imperfect Information 17 Make a Decision Independent of Analysis 17 Estimate the Relevant Information 17 Summary 19 Study Questions 20 References 21 Further Reading 21 Appendix (available online) CHAPTER 2 RECRUITMENT 22 Screening Job Applicants 24 Credentials 25 Learning a Worker’s Productivity 26 For Whom Is Screening Profitable? 28 Probation 30 Signaling 32 Who Pays and Who Benefits? 35 Examples 35 Signaling More Formally: Separating and Pooling Equilibria 36 Which Type of Firm Is More Likely to Use Signaling? 38 Summary 38 Study Questions 40 References 40 Further Reading 41 Appendix (available online) CHAPTER 3 INVESTMENT IN SKILLS 42 Matching 44 Investments in Education 45 Effects of Costs and Benefits 47 Was Benjamin Franklin Correct? 49 Investments in On-the-Job Training 51 General versus Firm-Specific Human Capital 54 Who Should Pay for Training? 56 Implications of On-the-Job Training 61 Rent Sharing and Compensation 63 Summary 66 Study Questions 67 References 68 Further Reading 68 Appendix (available online) CHAPTER 4 MANAGING TURNOVER 69 Is Turnover Good or Bad? 69 Importance of Sorting 70 Technical Change 70 Organizational Change 71 Hierarchical Structure 71 Specific Human Capital 71 Retention Strategies 72 Reducing Costs of Losing Key Employees 73 Embracing Turnover 75 Bidding for Employees 76 Raiding Other Firms: Benefits and Pitfalls 76 Offer Matching 80 Layoffs and Buyouts 82 Who to Target for Layoffs 83 Buyouts 86 Summary 90 Study Questions 91 References 91 Further Reading 92 Appendix (available online) PART TWO ORGANIZATIONAL AND JOB DESIGN 93 CHAPTER 5 DECISION MAKING 95 The Organization of an Economy 95 Markets as Information Systems 96 Markets as Incentive Systems 98 Markets and Innovation 98 Benefits of Central Planning 98 The Market as Metaphor for Organizational Design 100 Benefits of Centralization 102 Economies of Scale or Public Goods 102 Better Use of Central Knowledge 103 Coordination 103 Control 104 Benefits of Decentralization 105 Specific versus General Knowledge 105 Other Benefits of Decentralization 107 Decision Management and Control 108 Decision Making as a Multistage Process 108 Creativity versus Control 110 Investing in Better-Quality Decision Making 118 Summary 121 Study Questions 123 References 123 Further Reading 124 Appendix (available online) CHAPTER 6 ORGANIZATIONAL STRUCTURE 125 Types of Organizational Structures 126 Hierarchy 126 Functional Structure 128 Divisional Structure 129 Matrix or Project Structure 133 Network Structure 136 Which Structure Should a Firm Use? 139 Coordination 140 Two Types of Coordination Problems 140 Coordination Mechanisms 142 Implementation 145 Span of Control and Number of Levels in a Hierarchy 145 Skills, Pay, and Structure 148 Evolution of a Firm’s Structure 149 Summary 150 Study Questions 152 References 153 Further Reading 154 CHAPTER 7 JOB DESIGN 155 Patterns of Job Design 155 Optimal Job Design: Skills, Tasks, and Decisions 159 Multiskilling and Multitasking 159 Decisions 163 Complementarity and Job Design 164 When to Use Different Job Designs 165 Taylorism 166 Factors Pushing Toward Taylorism or Continuous Improvement 168 Intrinsic Motivation 171 Summary 173 Study Questions 175 References 176 Further Reading 177 Appendix (available online) CHAPTER 8 ADVANCED JOB DESIGN 178 Teams 179 Group Decision Making 179 Free Rider Effects 179 When to Use Teams 180 Other Benefits of Team Production 181 Implementation of Teams 186 Team Composition 187 Effects of Information Technology 190 Effects on Organizational Structure 190 Effects on Job Design 193 High-Reliability Organizations 196 Summary 198 Study Questions 199 References 200 Further Reading 200 Appendix (available online) PART THREE PAYING FOR PERFORMANCE 201 CHAPTER 9 PERFORMANCE EVALUATION 207 Purposes of Performance Evaluation 208 Ways to Evaluate Performance 208 Quantitative Performance Measurement 208 Risk Profile 209 Distortion 210 Manipulation 214 Match of the Performance Measure to Job Design 215 Subjective Evaluation 218 Why Use Subjective Evaluations? 219 Reduce Distortion and Manipulation 220 Practical Considerations 222 Summary 227 Study Questions 228 References 229 Further Reading 229 CHAPTER 10 REWARDING PERFORMANCE 230 How Strong Should Incentives Be? 233 Intuition 233 Imperfect Evaluations and Optimal Incentives 237 Summary: How Strong Should Incentives Be? 242 Paying for Performance: Common Examples 243 Rewards or Penalties? 243 Lump Sums, Demotions, or Promotions 246 Caps on Rewards 249 Applications 251 Profit Sharing and ESOPs 251 Organizational Form and Contracting 253 Motivating Creativity 254 Summary 255 Study Questions 256 References 257 Further Reading 257 Appendix (available online) CHAPTER 11 CAREER-BASED INCENTIVES 258 Promotions and Incentives 261 Should Promotions Be Used as an Incentive System? 261 Promotion Rule: Tournament or Standard? 262 How Do Promotions Generate Incentives? 267 Advanced Issues 271 Evidence 275 Career Concerns 276 Seniority Pay and Incentives 276 Practical Considerations 278 Summary 279 Study Questions 281 References 282 Further Reading 282 Appendix (available online) CHAPTER 12 OPTIONS AND EXECUTIVE PAY 284 Employee Stock Options 285 Stock Options–A Brief Overview 285 Should Firms Grant Employees Options? 286 Options as Incentive Pay 288 Executive Pay 293 What Is the Most Important Question? 293 Executive Pay for Performance 295 Other Incentives and Controls 297 Do Executive Incentives Matter? 299 Summary 302 Employee Stock Options 302 Executive Pay 303 Study Questions 303 References 304 Further Reading 304 Appendix (available online) PART FOUR APPLICATIONS 307 CHAPTER 13 BENEFITS 309 Wages versus Benefits 309 Why Offer Benefits? 312 Cost Advantage 312 Value Advantage 313 Government Mandate 315 Implementation of Benefits 316 Improving Employee Sorting 316 Cafeteria Plans 317 Pensions 319 Paid Time Off 327 Summary 329 Study Questions 331 References 331 Further Reading 332 CHAPTER 14 ENTREPRENEURSHIP AND INTRAPRENEURSHIP 333 Entrepreneurship 334 The Choice to Become an Entrepreneur 335 Intrapreneurship 344 Internal Markets 345 Creativity versus Control 347 Recruiting 347 Motivating Creativity 348 Speed of Decision Making 350 Reducing Bureaucracy 350 Continuous Improvement 351 Summary 353 Study Questions 353 References 354 Further Reading 355 Appendix (available online) CHAPTER 15 THE EMPLOYMENT RELATIONSHIP 356 Employment as an Economic Transaction 356 Perfect Competition 356 Imperfect Competition 357 Complex Contracting 358 Summary 361 Communication between Management andWorkers 362 Communication from Management to Workers 362 Communication from Workers to Management 364 The Optimal Level of Worker Consultation 366 Improving Cooperation 370 From the Prisoner’s Dilemma to Employment 372 Reputation and the Employment Relationship 374 Investing in Reputation 375 Summary 381 Personnel Economics in Practice 381 Study Questions 383 References 383 Further Reading 384 Appendix (available online) GLOSSARY 385 INDEX 393