Hiring Choices and Standards

Hiring Choices

• Potential for greatness employees are risky but may pay off, with limited loss upon termination
• Conservative choices are proven solid performers
• Choose solid performers if downside risk or termination costs are high, or if risk aversion is high
• Choose risky employees when upside potential is high or length of evaluation/employment is high

Asymmetric Information

• Firms can benefit from a risky hire through asymmetric information and firm-specific productivity

Hiring Standards Assumptions

• Firms aim to maximize profit
• No constraints exist on the firm's ability to hire
• Price of labor is constant

Setting Standards

• Balancing benefits against costs is crucial, always comparing with the best alternative
• The best worker offers the highest ratio of productivity to costs
• Consider foreign competition based on cost-effectiveness and the level of independence between coworkers on productivity
• Independent coworkers mean cost-benefit analysis drives choices
• Dependent coworkers mean higher quality workers are preferred due to mutual influence
• Independence with high capital means higher quality workers are preferred due to capital increases

The Limit of Workers

• The number of workers to hire is limited by diminishing marginal productivity
• In absence of risky hire information, decisions rely on gut instinct, data-driven estimation, or probation hiring

Screening

• Firms recruit specific types of workers once the type is decided
• Adverse selection is mitigated by screening job applicants

Types of Screening:

• Screen on credentials (useful due to informativeness, costs, and ROI)
• Learning about workers' productivity can be useful in the screening

Profitability of Screening

• Screening is more favorable when tests are effective and high the stakes
• Firms may incur increased wage costs due to labor market valuation of screened applicants
• Screening is profitable for job applicants

Reducing Candidates

• Screening reduces variance within the pool of candidates using employer set criteria
• Signaling further improves screening, demonstrating applicant value to the employer

Deferred Pay

• Deferred pay, involving delayed wages until promotion, serves as a screening mechanism
• Willingness to accept a lower wage signals higher quality, expecting future promotions

Signaling Formulas

• The gain from signaling must exceed its costs for high-quality applicants
• Gain should NOT be so high as to motivate low quality applicants to signal
• High-quality applicants signal and low-quality do not signal, creating a separating equilibrium
• Failure to meet conditions results in a pooling equilibrium where neither signals

Education and Training

Matching

• Employees with similar abilities may be more productive in different firms, thus matching helps place employees
• Matching results in higher turnover during early career, pay increases once fit is determined and better matches from internal candidates

Formula for Education

• Education is a better investment when labor market is weak: low wage equals low opportunity costs
• The longer the work life, the greater the investment in schooling
• Comparative advantage is gained through specialization
• Having educated and skilled workers helps manage and innovate technological tools

On the Job Training

• On-the-job training increases skills and productivity, has direct (books) and indirect costs (lower productivity during training)

Who Should Pay

• Individuals should pay for General Human Capital education
• Individuals can pay through accepting lower salary until training is complete
• When an employee is a strong match for the firm, the firm pays
• The firm pays when there is a tax benefit, or an attraction benefit- as a form of self-selection in recruiting

Solving FH Problems

• Splitting costs/returns solves the hold-up problem for FHC, making turnover costly and encouraging long-term relationships through implicit contracting
• The more firm-specific skills, the more pay an employee loses and more likely they stay

Thick Labor Market

• The presence of a thick labor market corresponds with labor skills more align with general human capital
• Easy to find work elsewhere and there is less incentive to stay

Investment Strategies

• Relationship-specific investment is a type of FHC
• Investment and Substitution are two views on apprenticeship systems
• High retention rates = firms follow Investment strategy

Substitution

• Blue collar work
• Small Firms
• Service sector
• Firms that use bargaining

Investment

• White collar work
• large firms
• manufactoring
• firms that use work councils
• More prevalent with High capitol

Job Design, Authority and Decision Making

Centralization vs Decentralization

• Decentralized economies are more effective at creating economic growth/jobs

Decentralized economy benefits

• Markets act as info system, using idiosyncratic knowledge from day-to-day
• Markets act as incentive system, firms want to use their assets efficiently and innovate

Benefits of Central Planning

• Governments reduce power of monopolies (due to economies of scale)
• Government provides public goods (radio) and addresses externalities (positive or negative)
• Minimum standards are set by the government

Market Metaphors for Org

• Centralized decision making occurs when sharing info is easy
• Decentralized decision making occurs when valuable and it’s important to align decisions

Centralization Benefits

• Economies of scale are achieved by sharing assets
• Allows for better spread of lessons
• Coordination can be easier in the right direction

Decentralization Orgs Benefit From

• Specific knowledge and Info cost
• Requited technical skills
• Subjective data

Decision Making

• Decentralization saves mgmt hours
• Decentralization can help developers and increase creativity

Errors

• Rejecting a potential project can be a false negative error
• Accepting a bad project is a false positive error

Authority Patterns

• Hierarchical, Flat, and Opinion based
• Small up side, and large downside means more hierarchical decision making
• Large upside small downside means flatter decision making

Characteristics

• Job design establishes employee duties and responsibilities
• Four design characteristics: multitasking, discretion, skills, and interdependence
• Coherent jobs are either (low, high, medium)
• Incoherent jobs have high jobs on some and low one others

Relationship Based on the Characteristics

• Performing more tasks implies workers have more skills
• On-the-jo b learning
• Jobs that are more interdependent

Narrow and Enriched

• An enriched job happens when an employee has a high work decision
• A narrow job has a low amount

Takeaways

• Multitasking has more skill
• Decision making has more skills
• Can distract employees

Tasks

• Performing multiple tasks
• Developing broach skills
• Focusing on specific skill

Transaction Cost

• Lowers transaction cost with more flexibility
• Saves time for specialization

Discretion

• More opportunity to communicate
• Increases innovation

Taylorism

• Taylorism is best in stable environments
• Helps increase motivation

Performance: Evaluation and Rewards

Ways to Evaluate Performance

• Broad PM (Overall skill, Price)
• Narrow PM (Performance, output)
• Combine the PMs
• Base PM (time worked hours etc)

Risk Management

• If risk is uncontrollable use narrow PM. Weakers, reduce risk workers have to take
• Use broader PM. (subjection) Employee influence of the risk

Distortions

• Caused by inappropriate distribution of weight
• Intangibles
• Horizon
• Low Broad PM = low distortion

Task Measurements

• The broader measure to precent distortion when tasking, prevents distortions
• Subject evaluations improve flaws

Improve

• Risk
• Decisions
• Communication

Costs that Influence

• Stay when productivity is at the high at the firm

Paying More

• Increase employees, increases output

Motivation

• Higher to pay, more incentive intensity. Increases work

Strong Incentive

• Stronger implies risky pay
• Risk is more uncontrollable, so more paid

Consideration of Strategies

Sort incentives

Actions

• Lead can cause decrease
• Affect team

Considerations

• Design for low prices and unethical behavior
• Rewards high and low

Internal/Intrinsical motivations

• Crowd others out

Norms

• Social and framing can cause change

Incentives

• Short-long term behavior is not designed to have the same effect

Implementation

• Ethical and financial considerations

Incentives

• After the incentives the effort will decline

Career-Based Incentives

Motivations

• Extrinsic is more effective after promotions

Reasons to Increase

• Potential increase
• Provides incentives
• Best performer
• Incentive system: pay
• Accidental System: Promote/Value

Promotions

• Tournament
• Standard
• Blended Approach

Formula

• Risk is filter through common factors in approach
• Less uncertainty that leads to high pay
• Increased is more expected
• Effect can increase

Threshold

• Near the more effective incentive

Incentives

• Aggressive hawks are the most affected by less sabotage (hawls/doves)

Outside

• Is combined with tournaments

Careers

• Motivations is to see how much better they can perform outside the firm

Seniority

Payments

• Defered to keep the workers more time
• Implicit to motivate, be at the firm longer to get better

Increases lead to

• Success
• Want higher

Motivations

Better performance

• Unnecessary to prevent
• Better retirement/workers

Compensating Pay

Attributes and Pay

• Based on demography
• Value the benefit is more affordable
• Wages helps
• Less pay
• Enhance performance

Plans

• Cafeteria

Incentivise

Good fit /healthcare

• Exploitive
• Sorting

Teams

Advantages

• Group decisions are slow
• free riders, but increased efficiency

More effect when

• tasks complement
• Complex

Norms

• Reduced effect on goals /Pressure
• More motivation and support

Composition in groups

Can be optimized by team and selection

Teams exhibit when there is

• Low costs/trust /worker satisfaction

Selected team = socialization

Performance = contribution

The team suffers unequal contributions Bonus is a win: get more incentives when the work load is low

CEO Compensation

Options for granting an employee

• Finance
• Startups
• Self selection
• Turnover

Level for the decision

• Affect the price, high incentives

ESO POS/Nags

Pay price ratio of options. If it is high you perform well to raise the incentives

• The Stock drops and has no impact anymore

Effects

Riskier in behavior Unethical if not valued

Incentives, pay and Comp.

• Linked to high levels of pay out, make the incentives high
• The executives should see how they effect the prices
• Decisions affecting the operational affects firms

Decisions

• Operational or Strategic
• The higher level of decision has more effect to increase the incentives
• Performance due to personal goals

Design Incentives

• Have designed performance

Contract

• The issues is that the manager is the goal Pay

Transparency

• To justify earnings

Performance

• Market rise

Incentives

• To work/goals

Reduce

• Sell options

Article 2

• Distorted.