Chapter 14: Attracting and Retaining Qualified Employees

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Chapter 14 Attracting and Retaining Qualified
Employees

• Brickley, Smith, and Zimmerman, Managerial
  Economics and Organizational Architecture, 4th ed.

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Attracting and retaining employeeslearning
objectives

• Explain the fundamental operation of labor
  markets, including wage determination, as well as
  the concepts of compensating differentials and
  human capital
• Explain the role and structure of internal labor
  markets, including the concepts of firm-specific
  human capital and efficiency wages

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Benchmark model of employment and compensation

• Assumptions
• competitive labor market
• wages determined by supply and demand
• current market wages costless to determine
• all jobs identical
• no long-term contracts
• all labor hired in spot market
• all compensation is monetary

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The competitive model of employment and wages

• Each firm hires until MRPmarket wage
• firm paying less than market wage cant fill
  positions
• firm paying more than market wage is at cost
  disadvantage

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Relaxing the benchmark assumptions

• All jobs are not identical
• employees will choose most desirable job for
  given level of pay
• firms must offer compensation for undesirable
  characteristics (compensating differential)
• Workers are not perfect substitutes
• Information is costly
• Compensation takes many forms
• Jobs may be long term

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Internal labor markets

• Some firms may pay efficiency wages
• compensation higher than market rates
• can motivate workers not to shirk
• may reduce turnover
• Compensation typically rises with seniority
• higher productivity
• incentive to work in best interest of firm,
  acquire firm-specific human capital

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Upward sloping earnings profile
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Promotions as tournaments

• Employees compete for promotions within
  organizational hierarchy
• Promotion systems have drawbacks
• undermine cooperation
• more discrete than monetary rewards
• Peter principle may apply
• employees may not value promotions
• influence costs may rise

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Compensation componentssalary and fringe benefits

• Salary and fringe benefit compensation are not
  perfect substitutes for employees
• the role of taxes
• groups may purchase fringes at lower price
• Employees may wish to trade between salary and
  fringes to attain optimum combination

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Employee preferences for salary and fringe
benefits
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Employer preferences for paying salary or fringe
benefits
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The optimal mixsalaries versus fringes

• Maximize firm value by meeting potential
  employees reservation utility at lowest cost
• Indifference curve is tangent to an isocost line

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Optimal mix between salary and fringe benefits
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Optimal choice of salary and fringe benefits with
payroll taxes
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Attracting particular types of employees with the
salary-benefits mix