ECON 308: Employment Decisions
Chapters 13
Week 13.1: Nov. 16, 2010
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Structure of Decision Rights (Ch 13)• BUNDLING TASKS INTO JOBS
– Specialized versus Broad Task Assignment – Productive Bundling of Tasks
• BUNDLING OF JOBS INTO SUBUNITS– Grouping Jobs by Function– Grouping Jobs by Product or Geography– Trade-offs between Functional and Product or Geographic
Subunits• Environment, Strategy, Architecture Matrix Organizations
– Mixed Designs– Network Organization– Organizing within Subunits
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Bundling Tasks into Job Subunits
• Example: FinWare Financial Software Distributor
Task 1
Task 3 Task 4
Task 2
CustomerType
Individuals
Firms
Sales Service
Function
3
Methods of grouping jobs
• U-form of organization(unitary)(Smokestack)– by functional specialty
• Sales• Finance• Engineering• Marketing• Manufacturing
– each primary function in one major sub-unit
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Finware as functional organization
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Specialized task assignment: Assign by function
• Benefits– Comparative Advantage (Different Skill sets)
• Sales• Technicians
– Lower Cross-Training Costs • Costs
– Foregone complementarities(Car door & Latch)– Coordination Costs: ( Insurance sales , underwritting)– Functional Myopia– Reduced Flexibility
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Incentive Issues
• Cost of monitoring• Broad Bundling and compensation (Faculty)
– Teaching– Research
• Incentive effects– Sales: Commission– Technicians: Customer Satisfaction
7
Bundling of Jobs into Sub-units
• Group by Function– Benefits
• Coordination within the functional area• Promotes functional expertise• Hiring and reward structure easier to define
– Problems• Management must coordinate• Information flows poorly across departments • Difficult to compensate profitability • Wasted time: (Airport Security 4 per flight)
8
Bundling of Jobs into Sub-units
• Group by Geography– Benefits
• Decentralized decision making authority• Managers compensated on performance of division
– Problems• May ignore interdependencies
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Where Functional Subunits Work Well
• Small firms• Homogeneous products• Stable underlying technology
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Methods of grouping jobs
• U-form of organization (unitary)• M-form of organization (multidivisional)• Matrix organization
– intersecting lines of authority– functional departments address performance reviews
and professional development– product/geographic subunits address customer/client
needs
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Matrix Organizations: Multidemensional
Consumer Products Team
Sales Division
Business Products Team
Service Division
Business Sales Department
Consumer Sales Department
Business ServiceDepartment
Consumer ServiceDepartment
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Chrysler
• Original: Functional• Revised: Product teams
– Engineers– Finance– Marketing– Assembly line production
• Ex. Moon-roof control on cheaper model
13
Case Study: IBM Credit
• Valued at $10 billion in 1993• Reduced the time needed to process credit
applications from 6 days to 4 hours– Old task assignment system: Functionally organized
• Credit Checkers• Contract preparers• Loan Pricing• Document preparation
– Reorganized task assignment:• Case workers
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IBM Credit’s Old Functional Organization
CreditDepartment
ContractsDepartment
PricingDepartment
DocumentsDepartment
General Manager
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IBM Credit’s Revised Organization
Case Worker Case Worker Case Worker Case Worker
General Manager
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ECON 308: Employment Decisions
Chapter 14
Attracting and Retaining Qualified Employees
Week 13.2: Nov. 18 , 2010
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Attracting & Retaining Employees
• Principles:– Maximum Value: Marginal Revenue Product
(willing to pay)– People won’t come to your firm until you make
them at least as well of as the could be elsewhere (Opportunity Cost: Have to pay)
– Paying more than is needed to attract employees puts a firm at a competitive disadvantage
– It is in the interest of both employee and firm to maximized the value created in the relationship
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Chapter 14 Organization
• No-frills Competitive Labor Market• Some complications
– Human Capital– Compensating Differentials– Costly Information– Internal Labor Markets– The Salary-Fringe Benefit Mix
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No-Frills Competitive Model
• Labor market is competitive – no discretion over wages
• Market Wages are costless to observe• Workers are identical• Jobs are identical• All labor is rented on the spot market• All compensation is monetary
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Basic Competitive Model
Number of Employees
E
Wag
e in
$
Marginal Revenue Product of labor
Market Wage Rate
E*
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Human Capital
• Terminology– Human Capital: Skills– Investment in Human Capital: Education, OJT– “rate of return” on Human Capital: MB > MC
• Types of Human Capital– General (Excel, Word, text messaging)– Firm Specific: (proprietary software)
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Compensating Differentials
• Consider 3 Welding jobs– Job X pays $8/hour in clean, air-conditioned
safe working conditions, – Job Y pays $8/hour in a dirty, outdoor
construction site,– Job Z pays $8/hour in ship construction
yard.• Is this an equilibrium wage?
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Compensating Differentials
• Must pay more when a job has undesirable characteristics– $20-300 more must by paid for every 1/10,000
increase in the probability of being killed on the job
– A firm with 1,000 employees could reduce wages by $20,000-$300,000 per year by preventing one accidental death every 10 years.
• Knowledge of necessary CD how to invest in alternatives: safety devices
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Compensating Differentials
• Implications–Unpleasant jobs get done–Companies are rewarded for making
jobs more pleasant–Workers may choose the level of risk
they wish to face
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Compensation Information: Costly to acquire
• Compensation may be hard to see– Workers differ in human capital so they may
differ in the compensation offered– Firms don’t share all of the details of
compensation with prospective employees• Symptoms…
– …of over-paying: too many qualified applicants– …of under-paying: few applicants, high
turnover
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Problems with under-paying
• Low compensation is associated with high turnover so costs of re-training are high
• When turnover is high there may be incentive problems
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Internal Labor Markets
• Hire at entry level, promote from within– Law Firms, Accounting Firms, Hospitals– In 1991 an employee between 45 & 54 had
typically been with the same employer for 10 years or longer
– Half of all men and ¼ of women stay with the same firm at least 20 years
• Most Internal Labor Markets rely on implicit contracts
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Tradeoffs in Long-TermEmployee Agreements
• Benefits of internal labor markets– Accumulates more firm-specific human capital– Better motivation– There is incentive to avoid behavior that is
dysfunctional in the long run– Managers know more about employee attributes
• Costs of internal labor markets– Restricted competition for advanced jobs
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Pay in Internal Labor Markets
Tenure with the firm
SalaryCompensation
Marginal RevenueProduct of Labor
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Tradeoffs with Career Earnings• Advantages
– Efficiency wages reduce turnover and shirking– Since pay rises faster than MRPL employees have strong
incentives to make the firm look good– Promotions become a reward for good behavior
• Disadvantages– Promotions may be manipulated because of destructive
behavior toward other rivals– Promotions are a crude incentive tool since they are
infrequent– The Peter Principle: People rise to level of incompetence– Much time may be spent lobbying managers for promotions
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The Salary-Fringe Benefit Mix
• Fringe Benefits account for about 25% of compensation for the average American
• Examples– Health Insurance– Non-Social Security pension programs– Subsidized Education– Discounted Meals
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Indifference Curves Between Salaries and Fringe Benefits
Fringe Benefits
Mon
etar
y C
ompe
nsat
ion
Utility = U1
Utility = U2
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Iso-Cost Lines Between Salaries and Fringe Benefits
Fringe Benefits
Mon
etar
y C
ompe
nsat
ion
Slope = -1
Iso-cost line at $50,000 ($50K) of total payment$50 K
$50K
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Optimal combination: Salaries and Fringe Benefits
Fringe Benefits
Mon
etar
y C
ompe
nsat
ion
$50 K
$50K$20K
$30K
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Fringe Benefits
• Payroll taxes– Make the iso-cost line flatter– The total tax-bill (including the part paid by the
employees) will matter in determining the optimal mix of fringe benefits
• Applications– Fringe benefits can be used to screen for particular
types of employees– Cafeteria-style plans are desirable when
administration costs are low and when adverse selection is not a problem.
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