Attracting

1
Attracting Retaining Employees

• Principles
• People wont come to your firm until you make
  them at least as well of as the could be
  elsewhere
• 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

2
Chapter Organization

• No-frills Competitive Labor Market
• Some complications
• Human Capital
• Compensating Differentials
• Costly Information
• Internal Labor Markets
• The Salary-Fringe Benefit Mix

3
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

4
Basic Competitive Model
Wage in
Market Wage Rate
Marginal Revenue Product of labor
E
Number of Employees
E
5
Human Capital

• Terminology
• Human Capital
• Investment in Human Capital
• rate of return on Human Capital
• Types of Human Capital
• General
• Specific

6
Compensating Differentials

• Consider 2 jobs
• Job X pays 8/hour in clean, safe working
  conditions
• Job Y pays 8/hour in a dirty, noisy factory
• Is this an equilibrium wage?

7
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.

8
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

9
Costly Information

• Compensation may be hard to see
• Workers differ in human capital so they may
  differ in the compensation offered
• Firms dont 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

10
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

11
Internal Labor Markets

• Hire at entry level, promote from within
• 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

12
Tradeoffs in Long-TermEmployee Agreements

• Advantages 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

13
Pay in Internal Labor Markets
Compensation
Salary
Marginal RevenueProduct of Labor
Tenure with the firm
14
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
• Much time may be spent lobbying managers for
  promotions

15
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

16
Fringe Benefits

• Payroll taxes
• Changes tradeoff between salary and fringe
  benefits
• 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.

17
Practice Questions
14.2 In the basic competitive model, why do
employees pay for general training and firms pay
for specific training?
18
Practice Questions
14.3 Why do firms form internal labor
markets? 14.4 Evaluate the following
statement Firms are free to set salaries in any
manner they want in an internal labor market.
19
Practice Questions
14-12. The university of Medford pays the full
tuition for the children of faculty members at
any university in the world. Recently, this
policy has received bad publicity. The argument
has been made that people in other occupations
have to pay the tuition costs for their children
and so should college professors. According to
this argument, it is not fair to have these
relatively well paid people get subsidized in
this manner. The board of trustees of the
University of Medford has been asked to
reconsider this policy. Provide an economic
argument to explain why the board of trustees
might want to continue this policy.
20
Practice Questions
14-9. A recent study found that CEOs in Europe
are paid less than CEOs in the U.S. even after
controlling for a firms size and industry. Does
this imply that U.S. executives are overpaid?
Explain.
21
Practice Questions
Statement 1 People prefer to get paid money,
rather than fringe benefits, since they can
choose how they spend it. As a general rule, if
the firm cant get a better price for the benefit
than the employees can, a profit-maximizing firm
will pay employees money rather than
benefits. Statement 2 Since employees have
different tastes in fringe benefits, it is
generally profitable to give employees lots of
choice among different benefits
packages. a. Both statements are true b. Both
statements are false c. Statement 1 is true, but
2 is false d. Statement 2 is true, but 1 is
false
22
Practice Questions
Which of the following is not an advantage of
internal labor markets? a. Workers tend to
accumulate more firm-specific human capital b.
Managers tend to learn more about employee
attributes c. Motivation of workers is often
better d. More types of skill are available to
hire when filling high level jobs