ECON 308: Employment Decisions
Chapters 13
Week 13: April 26-28, 2011
1
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
2
Bundling Tasks into Job Subunits
• Example: FinWare Financial Software Distributor
Function
Individuals
Sales
Service
Task 1
Task 2
Customer
Type
Firms
Task 3
Task 4
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
4
Finware as functional organization
5
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
6
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
9
Where Functional Subunits Work Well
• Small firms
• Homogeneous products
• Stable underlying technology
10
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
Sales Division
Business Products Team
Consumer Products Team
Service Division
Business Sales
Department
Business Service
Department
Consumer Sales
Department
Consumer Service
Department
12
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
General Manager
Credit
Department
Contracts
Department
Pricing
Department
Documents
Department
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IBM Credit’s Revised Organization
General Manager
Case Worker
Case Worker
Case Worker
Case Worker
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ECON 308: Employment Decisions
Chapter 14
Attracting and Retaining Qualified Employees
Week 13.2: Nov. 18 , 2010
17
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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Wage in $
Basic Competitive Model
Market Wage Rate
Marginal Revenue
Product of labor
E
E*
Number of Employees
21
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)
22
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
27
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-Term
Employee 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
29
Pay in Internal Labor Markets
Compensation
Salary
Marginal Revenue
Product of Labor
Tenure with the firm
30
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
32
Monetary Compensation
Indifference Curves Between Salaries and
Fringe Benefits
Utility = U2
Utility = U1
Fringe Benefits
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Monetary Compensation
Iso-Cost Lines Between Salaries
and Fringe Benefits
$50 K
Iso-cost line at $50,000 ($50K) of total payment
Slope = -1
$50K
Fringe Benefits
34
Monetary Compensation
Optimal combination: Salaries
and Fringe Benefits
$50 K
$30K
$20K
$50K
Fringe Benefits
35
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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