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on Human Capital and Human Resource Management |
| By: | Dey, Oindrila; Banerjee, Swapnendu |
| Abstract: | This paper characterizes the structure of monetary incentives in an organization with varying differences in employee status. With the help of a moral hazard framework with limited liability we show that for agents with lower outside option increased status leads to lower incentive pay whereas exactly the opposite happens for agents with higher outside option. For agents with very high status such that the limited liability doesn’t bind, an exogenous increase in status level leads to an unambiguous decrease in optimal incentive payment. |
| Keywords: | Status, incentives, motivation, moral hazard, optimal contract |
| JEL: | L1 L14 |
| Date: | 2014–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:58399&r=hrm |
| By: | Pablo D’Este (INGENIO [CSIC-UPV], Universidad Politécnica de Valencia, Spain); Alberto Marzucchi (Dept. of International Economics, Institutions and Development (DISEIS), Catholic University of Milan, Italy; INGENIO [CSIC-UPV], Universidad Politécnica de Valencia, Spain); Francesco Rentocchini (Southampton Business School, University of Southampton, United Kingdom) |
| Keywords: | innovation failure, exploration, exploitation, human capital, learning |
| JEL: | O32 D83 D22 J24 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:sru:ssewps:2014-23&r=hrm |
| By: | Carlo Cambini; Sara De Masi; Laura Rondi |
| Abstract: | This paper examines the relationship between CEO pay and firm performance within a sample of European publicly listed energy utilities from 2000 to 2010, focusing on the differential responses that arise from being subject to different regulatory regimes. In particular, we investigate the difference in pay-performance sensitivity across regulated and unregulated firms as well as the impact of different regulatory schemes – incentive vs. cost-based regulation - on CEO monetary incentives. Using various measures of performance, we find that European energy utilities link CEO compensation to firm performance, but CEO pay-performance is higher for unregulated companies. When we focus on the effect of alternative regulatory schemes, our results show that payperformance sensitivity is significantly higher for firms under incentive regulation than within firms under cost-based regulation. This result holds after controlling for firm - private vs. state - ownership and for varying degrees of market liberalization across countries. |
| Keywords: | Managerial compensation, Incentive contracts, Incentive regulation, Energy utilities |
| JEL: | G30 J33 L51 M12 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bcu:iefewp:iefewp58&r=hrm |
| By: | Marin, Dalia; Schymik, Jan; Tarasov, Alexander |
| Abstract: | We incorporate trade in tasks à la Grossman and Rossi-Hansberg (2008) into a small open economy version of the theory of firm organization of Marin and Verdier (2012) to examine how offshoring affects the way firms organize. We show that the offshoring of production tasks leads firms to reorganize with a more decentralized management, improving the competitiveness of the offshoring firms. We show further that the offshoring of managerial tasks relaxes the constraint on managers but toughens competition, and thus has an ambiguous impact on the level of decentralized management and CEO wages of the offshoring firms. In sufficiently open economies, however, managerial offshoring unambiguously leads to more decentralized management and to larger CEO wages. We test the predictions of the model based on original firm level data we designed and collected of 660 Austrian and German multinational firms with 2200 subsidiaries in Eastern Europe. We find that offshoring firms are 33.4% more decentralized than non-offshoring firms. We find further that the average fraction of managers offshored reduces the level of decentralized management by 3.1%, but increases the level of decentralized management by 4% in industries with a level of openness above the 25th percentile of the openness distribution. Lastly, we find that one additional offshored manager lowers CEO wages relative to workers by 4.9%. |
| Keywords: | international trade with endogenous organizations; the rise of human capital; theory of the firm; multinational firms; CEO pay |
| JEL: | F12 F14 L22 D23 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:482&r=hrm |
| By: | Roel van Veldhuizen (WZB Berlin Social Science Center); Hessel Oosterbeek (Universiteit van Amsterdam); Joep Sonnemans (Universiteit van Amsterdam) |
| Abstract: | In an influential study, Mas and Moretti (2009) find that “worker effort is positively related to the productivity of workers who see him, but not workers who do not see him”. They interpret this as evidence that social pressure can reduce free riding. In this paper we report an attempt to reproduce the findings of Mas and Moretti in a lab experiment. Lab experiments have the advantage that they can shut down alternative channels through which workers can influence the productivity of colleagues whom they observe. Although the subjects in our experiment are aware of the productivity of others and although there is sufficient scope for subjects to vary their productivity, we find no evidence of the type of peer effects reported by Mas and Moretti. This suggests that their findings are less generalizable than has been assumed. |
| Keywords: | peer effects, experiment, laboratory experiment |
| JEL: | C91 J24 |
| Date: | 2014–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20140051&r=hrm |
| By: | Sander Hoogendoorn (CPB Netherlands Bureau for Economic Policy Analysis, the Netherlands); Simon C. Parker (Ivey Business School, Western University, London, Canada); Mirjam van Praag (Copenhagen Business School, Denmark) |
| Abstract: | What is the effect of dispersed levels of cognitive ability of members of a (business) team on their team’s performance? This paper reports the results of a field experiment in which 573 students in 49 teams start up and manage real companies under identical circumstances. We ensured exogenous variation in — otherwise random — team composition by assigning students to teams based on their measured cognitive abilities (Raven test). Each team performs a variety of tasks, often involving complex decision making. The key result of the experiment is that the performance of business teams first increases and then decreases with ability dispersion. We seek to understand this finding by developing a model in which team members of different ability levels form sub-teams with other team members with similar ability levels to specialize in different productive tasks. Diversity spreads production over different tasks in order to escape diminishing marginal returns under specialization. The model comes with a boundary condition: our experimental finding is most likely to emerge in settings where different tasks exhibit moderate differences in their productive contributions to total output. |
| Keywords: | Ability dispersion, team performance, field experiment, entrepreneurship |
| JEL: | C93 D83 J24 L25 L26 M13 M54 |
| Date: | 2014–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20140053&r=hrm |
| By: | Heiner Schmittdiel (Erasmus University Rotterdam) |
| Abstract: | In this paper, we test empirically whether there is a relationship between corporate income taxes and CEO bonus payments. Using Compustat and ExecuComp data from 1992 to 2010, we find mixed results. Looking at the whole sample, the average bonus contract rewards tax savings excessively in comparison to other determinants of corporate net income. A possible explanation is that managers require to be compensated for the additional risk inherent in running an aggressive tax strategy. In accordance with previous literature, we document a substantial heterogeneity in compensation practices across industries. It appears that our main result is driven by firms in the Industrial and Retail sectors. We further find that companies with greater tax planning opportunities, for example by virtue of size or operations abroad, are more likely to condition the CEO’s bonus on corporate income taxes. |
| Keywords: | CEO incentives, executive compensation, tax avoidance |
| JEL: | H25 H26 M41 M52 |
| Date: | 2014–04–25 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20140048&r=hrm |
| By: | Fang, Lei (Federal Reserve Bank of Atlanta); Nie, Jun (Federal Reserve Bank of Kansas City) |
| Abstract: | The high U.S. unemployment rate after the Great Recession is usually considered to be a result of changes in factors influencing either the demand side or the supply side of the labor market. However, no matter what factors have caused the changes in the unemployment rate, these factors should have influenced workers' and firms' decisions. Therefore, it is important to take into account workers' endogenous responses to changes in various factors when seeking to understand how these factors affect the unemployment rate. To address this issue, we estimate a Mortensen-Pissarides style of labor-market matching model with endogenous separation decisions and stochastic changes in workers' human capital. We study how agents' endogenous choices vary with changes in the exogenous shocks and changes in labor-market policy in the context of human capital dynamics. We reach four main findings. First, once workers have accounted for and are able to optimally respond to possible human capital loss, the unemployment rate in an economy with human capital loss during unemployment will not be higher than in an economy with no human capital loss. The reason is that the increase in the unemployment rate led by human capital loss is more than offset by workers' endogenous responses to prevent them from being unemployed. Second, human capital accumulation on the job is more important than human capital loss during unemployment for both the unemployment rate and output. Third, workers' endogenous separation rates will decline when job-finding rates fall. Fourth, taking into account the endogenous responses, unemployment insurance extensions contributed 0.5 percentage point to the increase in the aggregate unemployment rate in the 2008–12 period. |
| Keywords: | unemployment; unemployment insurance benefits; matching model; human capital; labor market |
| JEL: | E24 J08 J24 J45 |
| Date: | 2014–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2014-02&r=hrm |
| By: | Neyse, Levent; Friedl, Andreas; Schmidt, Ulrich |
| Abstract: | Economic experiments report that individuals perform better under a piece rate payment scheme in comparison to a fixed payment scheme. The reason is straightforward: incentives motivate people, and without incentives they decrease their effort. Yet women are prone to choose a fixed payment over a piece rate payment scheme. We aim to find out if this gender effect is related to prenatal exposure to testosterone, which by nature is sexually dimorphic and has permanent effects on human brain development with an impact on cognitive and physical skills, as well as behavior. We investigate the effect of prenatal testosterone exposure on performance adjustment in a real effort task. Each subject is salaried under either a fixed rate or piece rate payment scheme for five periods and subsequently encounters the alternative payment method for another five periods. To observe the prenatal testosterone levels that the participants were exposed to during pregnancy, we use the so-called digit ratio as an indirect measurement method. It uses the length-ratio between the participants’ index and ring fingers to infer about their in utero testosterone exposure. Our results confirm the previous findings indicating that individuals perform better when incentivized by a piece rate payment scheme. Subjects who are paid piece rate in the first half of the experiment immediately decrease their performance at the beginning of the second half when paid under a fixed payment scheme. In contrast, subjects increase their effort if the payment method is switched from fixed rate to piece rate in the second half of the experiment. Subjects who were exposed to higher levels of prenatal testosterone provide significantly lower effort when the payment scheme is switched from piece rate to fixed rate. |
| Keywords: | Digit Ratio; 2D:4D; Real Effort Task; Payment Schemes; Incentives |
| JEL: | C91 D87 J33 |
| Date: | 2014–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59549&r=hrm |
| By: | Pedros Silos (Federal Reserve Bank of Atlanta); Eric Smith (University of Essex) |
| Abstract: | Online appendix for the Review of Economic Dynamics article |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:append:13-132&r=hrm |
| By: | Banerjee, Swapnendu; Sarkar, Mainak |
| Abstract: | Using the classic moral hazard problem with limited liability we characterize the optimal incentive contracts when first an other-regarding principal interacts with a self-regarding agent. The optimal contract differs considerably when the principal is ‘inequity averse’ vis-a-vis the self-regarding case. Also the agent is generally (weakly) better-off under an ‘inequity averse’ principal compared to a ‘status seeking’ principal. Then we extend our analysis and characterize the optimal contracts when both other-regarding principal and other-regarding agent interact. |
| Keywords: | Other regarding preferences, self regarding preferences, inequity-averse, status- seeking, optimal contract |
| JEL: | L2 |
| Date: | 2014–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59654&r=hrm |
| By: | William Fuchs; Luis Garicano; Luis Rayo |
| Abstract: | We study contractual arrangements that support an efficient use of time in a knowledge-intensive economy in which agents endogenously specialize in either production or consulting. The resulting market for advice is plagued by informational problems, since both the difficulty of the questions posed to consultants and the knowledge of those consultants are hard to assess. We show that spot contracting is not efficient since lemons (in this case, self-employed producers with intermediate knowledge) cannot be appropriately excluded from the market. However, an ex-ante, firm-like contractual arrangement uniquely delivers the first best. This arrangement involves hierarchies in which consultants are full residual claimants of output and compensate producers via incentive contracts. This simple characterization of the optimal ex-ante arrangement suggests a rationale for the organization of firms and the structure of compensation in knowledge-intensive sectors. Our findings correspond empirically to observed arrangements inside professional service firms and between venture capitalists and entrepreneurs. |
| Keywords: | Contracting, experts, professional service firms, partnership, venture capital |
| JEL: | D86 L22 J33 J44 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1308&r=hrm |
| By: | Cheong, Juyoung; Kim, Woochan |
| Abstract: | According to the prior literature, family executives of family-controlled firms receive lower compensation than non-family executives. One of the key driving forces behind this is the existence of family members who are not involved in management, but own significant fraction of shares and closely monitor and/or discipline those involved in management. In this paper, we show that this assumption falls apart if family-controlled firm is part of a large business group, where most of the family members take managerial positions but own little equity stakes in member firms. Using 2014 compensation data of 564 executives in 368 family-controlled firms in Korea, we find three key results consistent with our prediction First, family executives are paid more than non-family executives (by 27% more, on average) and this family premium is pronounced in larger business group firms even after controlling for potential selection bias problems. Second, pay to family-executives falls with the influence of outside family members (their aggregate ownership in the firm minus the ownership held by the family executive in the same firm). Third, family premium in large business group firms rises with group size, but falls with family’s cash flow rights. It also rises for group chairs, but falls with the number of board seats the family-executive holds within the group. |
| Keywords: | executive compensation, family firms, business groups, chaebols, dividend |
| JEL: | G30 G32 G34 G35 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59250&r=hrm |
| By: | Sandra Cavaco; Patricia Crifo; Antoine Rebérioux; Gwenaël Roudaut |
| Abstract: | This paper develops a two-way director-firm fixed effect model to study the relationship between independent directors’ individual heterogeneity and firm operating performance, using French data. This strategy allows considering and differentiating in a unified empirical framework mechanisms related to board functioning and to director selection. We first show that the independence status, netted out unobservable individual heterogeneity, is negatively related to performance. This result suggests that independent board members experience an informational gap compared to other affiliated members. However, we show that industry-specific expertise as well as informal connections inside the boardroom may help to bridge this gap. Finally, we provide evidence that independent directors have higher intrinsic ability as compared to affiliated board members, consistent with a reputation-based selection process. |
| Keywords: | independent director heterogeneity, information asymmetry, director selection, firm performance, two-way fixed effect model, |
| JEL: | G30 G34 |
| Date: | 2014–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2014s-39&r=hrm |
| By: | Savage, Michael; Callan, Tim; Keane, Claire; Kelly, Elish; Walsh John |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:bp2015/3&r=hrm |
| By: | Junichiro Ishida |
| Abstract: | In most firms, if not all, workers are divided asymmetrically in terms of authority and responsibility. In this paper, we view the asymmetric allocations of authority and responsibility as essential features of hierarchy and examine why hierarchies often prevail in organizations from that perspective. A key departure is that we consider a case where the authority relationship is defined only by the allocation of responsibility via contingent contracts. Within this framework, we show that the contractual arrangement which allocates responsibility asymmetrically often emerges as the optimal organizational form, which gives rise to the chain of command pertaining to hierarchical organizations. |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0914&r=hrm |
| By: | Galashin, Mikhail; Popov, Sergey |
| Abstract: | We study how ownership structure and management objectives interact in determining the company size without assuming information constraints or explicit costs of management. In symmetric agent economies, the optimal company size balances the returns to scale of the production function and the returns to collaboration efficiency. For a general class of payoff functions, we characterize the optimal company size, andwe compare the optimal company size across different managerial objectives. We demonstrate the restrictiveness of common assumptions on effort aggregation (e.g., constant elasticity of effort substitution), andwe showthat common intuition (e.g., that corporate companies are more efficient and therefore will be larger than equal-share partnerships) might not hold in general. |
| Keywords: | team; partnership; effort complementarities; firm size |
| JEL: | D02 D2 J5 L11 |
| Date: | 2014–06–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:58540&r=hrm |