nep-hrm New Economics Papers
on Human Capital and Human Resource Management
Issue of 2022‒07‒25
six papers chosen by
Patrick Kampkötter
Eberhard Karls Universität Tübingen

  1. Do Firms Gain from Managerial Overconfidence? The Role of Severance Pay By Clara Graziano; Annalisa Luporini
  2. On the Role of Learning, Human Capital, and Performance Incentives for Wages By Braz Camargo; Fabian Lange; Elena Pastorino
  3. Performance-induced CEO turnover By Jenter, Dirk; Lewellen, Katharina
  4. Control Aversion in Hierarchies By Alessandro De Chiara; Florian Engl; Holger Herz; Ester Manna
  5. Social Preferences and the Distribution of Rewards By Raphael Soubeyran; Nicolas Quérou; Mamadou Gueye
  6. Going Public and the Internal Organization of the Firm By Bias, Daniel; Lochner, Benjamin; Obernberger, Stefan; Sevilir, Merih

  1. By: Clara Graziano; Annalisa Luporini
    Abstract: We analyze the effects of optimism and overconfidence when the manager’s compensation package includes severance pay and the CEO has bargaining power. We find that optimism does not affect incentive pay but increases severance pay with a negative effect on profit. Overconfidence, on the contrary, reduces incentive pay as shown by the previous literature, while its effect on severance pay depends on the intensity of the bias. High values of overconfidence yield an inefficient level of investment which in turn increases severance pay with a negative impact on firm profit. Thus, the attempt to exploit managerial overconfidence to reduce incentive pay may if the manager is replaced and severance agreements come into effect. Our model explains the large severance payments documented by empirical literature by showing that discretionary pay in excess of contractual severance pay may represent a form of efficient contracting when the manager is overconfident and optimist.
    Keywords: overconfidence, optimism, managerial compensation, severance pay, entrenchment
    JEL: J33 D86 D90 L21
    Date: 2022
  2. By: Braz Camargo; Fabian Lange; Elena Pastorino
    Abstract: Performance pay in general amounts to only a small fraction of total pay. In this paper, we show that performance pay is nevertheless important for the level and dynamics of wages over the life cycle because of the incentives it indirectly provides for human capital acquisition and because of its impact on the variability of total pay. We articulate this argument in the context of a model that combines three key mechanisms for wage growth and dispersion: employer learning about workers’ ability, human capital acquisition, and performance incentives. We use this model to account for the experience profile of wages, their dispersion, and their composition in terms of fixed and variable (performance) pay. The model admits an analytical decomposition of performance pay into four terms that capture (i) the trade-off between risk and incentives characteristic of settings of moral hazard; (ii) the insurance that firms provide against the wage risk due to the uncertainty about ability; (iii) incentives for effort arising from this uncertainty (career concerns); and (iv) incentives for effort generated by the prospect of human capital acquisition. We prove the model is identified under standard assumptions. Despite its parsimony, the model fits the data very well, including the empirical finding that performance pay as a share of total pay first increases and then decreases with experience. This feature of performance pay, which we are the first to document, runs contrary to the prediction of standard models of performance incentives that the ratio of performance pay to total pay increases with experience, especially at the end of the life cycle. Our estimates imply that effort to produce output augments human capital. Also, human capital acquisition and insurance against uncertainty about ability are quantitatively the main determinants of performance pay. Career-concerns incentives, on which the theoretical literature has focused, and the strength of the contemporaneous trade-off between risk and incentives—the primary determinant of variable pay in static moral-hazard models—are instead much less relevant. Importantly, we find that through the cumulative impact of effort on the job on human capital acquisition and the contribution of variable pay to the variance of total pay, performance incentives are a crucial source of wage growth and dispersion over the life cycle.
    JEL: D8 D86 J24 J3 J31 J33 J41 J44
    Date: 2022–06
  3. By: Jenter, Dirk; Lewellen, Katharina
    Abstract: This paper revisits the relationship between firm performance and CEO turnover. Instead of classifying turnovers into forced and voluntary, we introduce performance-induced turnover, defined as turnover that would not have occurred had performance been “good”. We document a close turnover-performance link and estimate that 38%–55% of turnovers are performance induced. This is significantly more than the number of forced turnovers, though the two types of turnovers are highly correlated. Compared to the predictions of Bayesian learning models, learning about CEO ability appears to be slow, and boards act as if CEO ability (or match quality) was subject to frequent shocks.
    JEL: G30 G34
    Date: 2021–02–01
  4. By: Alessandro De Chiara; Florian Engl; Holger Herz; Ester Manna
    Abstract: Companies typically control various aspects of their workers’ behaviors. In this paper, we investigate whether the hierarchical distance of the superior who imposes such control measures matters for the workers’ ensuing reaction. In particular, we test, in a laboratory experiment, whether potential negative behavioral reactions to imposed control are larger when they are implemented by a direct superior rather than a hierarchically more distant superior. We find that hierarchical proximity indeed magnifies such control aversion and discuss several potential channels for this result.
    Keywords: control aversion, hierarchies, delegation, principal-agent-problem
    JEL: C92 D23 M12
    Date: 2022
  5. By: Raphael Soubeyran (CEE-M - Centre d'Economie de l'Environnement - Montpellier - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Institut Agro Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - Université de Montpellier 2022); Nicolas Quérou (CEE-M - Centre d'Economie de l'Environnement - Montpellier - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Institut Agro Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - Université de Montpellier 2022); Mamadou Gueye (LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Motivated by the potential tension between coordination, which may require discriminating between identical agents, and social comparisons, which may call for small pay differentials, we analyze the optimal reward scheme in an organization involving agents with social preferences whose tasks are complementary. Although a tension exists between the effects of inequality aversion and altruism, there is always more reward inequality when agents are inequality-averse and altruistic than when they are purely self-interested. We then highlight how our results differ when agents are not altruistic but rather inequality-averse a la Fehr and Schmidt (1999)..
    Keywords: incentives,coordination,principal,agents,social comparisons
    Date: 2022–06–28
  6. By: Bias, Daniel (Swedish House of Finance at the Stockholm School of Economics); Lochner, Benjamin (Institute for Employment Research (IAB), Nuremberg, Germany ; FAU); Obernberger, Stefan (Erasmus School of Economics at Erasmus University Rotterdam); Sevilir, Merih (Kelley School of Business at Indiana University)
    Abstract: "We examine how firms adapt their organization when they go public. To conform with the requirements of public capital markets, we expect IPO firms to become more organized, making the firm more accountable and its human capital more easily replaceable. We find that IPO firms transform into a more hierarchical organization with smaller departments. Hiring is strongest in jobs requiring knowledge in finance, accounting, and management. New hires are better educated, but less experienced than incumbents, which reflects the staffing needs of a more hierarchical organization. Employee turnover is sizeable and directly related to changes in hierarchical layers. Wage inequality increases in public firms as they become more hierarchical. Overall, going public is associated with a comprehensive transformation of the firm’s organization which becomes geared towards operating efficiently and in accordance with capital market standards." (Author's abstract, IAB-Doku) ((en))
    Keywords: IAB-Open-Access-Publikation
    JEL: D20 G32 G34 M50
    Date: 2022–06–08

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