Personnel Strategy 45-971

Personnel Strategy45-971 Professor Robert A. Miller Mini 4, 2014

Course objectives • This course will help you to better understand: • How workers respond to opportunities for advancement and incentives that affect their working conditions and financial compensation. • The legal constraints encumbering employers in the workplace and their industrial relations, and the opportunities for substituting between different types of labor inputs and also external sourcing. • How to design tasks, form and nurture the best worker-firm matches, and provide incentives that induce them to pursue your objectives.

Course website The course website is: http://www.comlabgames.com/45-971/ At the website you can find: the course syllabus power points slide lecture notes background reading material games you can download material for the assignments

Lecture 1Recruiting and Hiring To motivate why personnel management in the U.S. is an important topic for business analysis, we begin with a brief overview of demographics in the U.S. and the its labor market. Then we provide evidence showing that incentives to align the workers goals with the firms are an important tool in personnel management. This motivates the course title “Personnel Strategy”, recognizing that players with different life goals impact on each other in the workplace. Finally we conduct classroom experiments to illustrate how employers with different infrastructure compete for workers of different quality.

Is hiring in the U.S. labor market too costly? • An international comparison of hourly compensation costs for manufacturing production workers shows: Source: U.S. Bureau of Labor Statistics, www.bls.gov (2010)

ScienceTechnologyEngineeringMath • Comparing educational achievement across the OECD. Sources: STEM Education, Preparing for the Jobs of the Future. A Report by the Joint Economic Committee Chairman’s Staff Senator Bob Casey, Chairman, April 2012.

Labor force participation rates by age (percent) • Participation of young adults (20 -24) in the labor force gives them valuable job market experience. Source: “International Comparisons of Annual Labor Force Statistics, 1970-2012”, International Labor Comparisons, June 2013. http://www.bls.gov/fls/flscomparelf/lfcompendium.pdf

Unemployment rates in 10 countries,seasonally adjusted (percent) Source: “International Unemployment Rates and Employment Indexes, Seasonally Adjusted, 2009-2013”, Bureau of Labor Statistics, August 2013. http://www.bls.gov/fls/intl_unemployment_rates_monthly.pdf

Is the U.S. labor market globally competitive? • Compared to other similarly developed countries, the U.S. has comparable: • wage rates • educational accomplishments • workforce participation rates • unemployment rates • The internal U.S. labor market is much bigger than any single European country, is about the size of the whole E.U. labor market, but is much more integrated. • Energy prospects in the U.S. look very promising. Canada and Australia are also endowed with a vast natural resource base they have benefited from enormously over the past 50 years.

Comparing future demographics of the U.S. with other countries • Ranking countries by projected population increase between 2010 and 2040, the U.S. is fifth (at 93 million), behind India (467), Nigeria (231), Pakistan (101) and Tanzania (also 93). • The U.S. is the only country in the top: • 25 countries that is wealthy • 10 with a total fertility rate at near replacement • 25 with a median age of over 30 years old • 25 where more than 6% of its population are foreign born (13% in American population) • So the U.S. is much wealthier, older, much less fertile and has much more immigration than every other country that will experience similar population growth.

The long term labor market outlook • Based on this long term evidence I believe the U.S. labor market will grow substantially over the next 30 years. • This will be matched with more firms with more capital, and thus greater productivity per worker in the U.S. • What strategies should firms be adopting to manage the larger labor market? • This course is directed at analyzing personnel strategy in the American labor market.

How can employees be managed? • There are four main ways bosses induce their subordinates to do what they want them to: • Command, control and force. • Persuade, shame and coerce. • Deceive and trick. • Provide incentives.

Command and control • This is common in hierarchic structures such as the military, where there is a clear chain of command, and in war, little time to deliberate. • It also arises in production lines, where a process involving work duties must be integrated or coordinated with industrial processes using machinery. • Note that workers may willingly accept the challenge of performing in these settings, partly for compensation before, during and after the period of employment.

Persuasion, shaming and coercion • This is most effective when management knows the emotional and psychological vulnerabilities of their workforce. • It is common in military and police academies, college sport, and activism in political parties. • It does not necessarily involve duplicity: employees may understand their own vulnerabilities and when enrolling agree to be subjected to what some would describe as abuse.

Deception and trickery • This is more likely to work: • the longer the lie can be sustained • and the less recourse employees have to extract compensation or vengeance later. • Newly independent teenagers and young adults, the mentally handicapped, and illegal migrants seem more susceptible than other demographic groups. • It is most prevalent in illegal activities where legal recourse is almost nonexistent, such as: • illegal immigration and itinerant work • prostitution (sometimes combined with the above)

Incentives • Incentive schemes: • reward employees for pursuing objectives they might otherwise disregard • are also used as a selection device by appealing to some groups of potential employees versus others. • Incentives are used in conjunction with the other methods. For example in the military forces, incentives are used to attract recruits, by subsidizing their education, and making life more attractive for their family during and after their term of employment. • This course will focus on the provision of incentives. • Nevertheless Assignment 1 is a case study in which all four management tools appear to have been used.

Do employees react to incentives? • An exhaustive study is clearly beyond the scope of this course but here are four pieces of evidence: • Navy recruitments peak just before a performance review and trough immediately after. • Training centers are paid annual bonuses for the rate at which their “graduates” find jobs. They maximize the speed at which their unemployable students graduate, subject to the constraint of not losing the bonus. • Team compensation increases the performance of the least productive members and reduces the performance of the most producitve members. • Employee productivity increases work harder when they given financial incentives.

When do recruiters work hard? The Behavior of Navy Recruiters (Asch 1990).

Job Training Partnership Act (JTPA) • The JTPA pays training centers for all graduates plus the percentage finding employment shortly thereafter. INCIDENCE OF DELAYED TERMINATION BY EMPLOYMENT PERFORMANCE OUTCOME EMPLOYMENT RATE AT TERMINATION IN PROGRAM YEAR 1988 MONTHLY ENROLLMENT AND TERMINATION COUNTS Courty and Marschke (1997)

Team members monitor each otherwhen it pays Response of Telephone Operators to Team-Based Compensation (Hansen 1997).

Employees work harder when offeredfinancial incentives Profit Sharing and Productivity (Kruse 1993).

What are the main issuesin managing personnel? • Roughly speaking, personnel strategy is about designing and implementing: • legally acceptable employment protocols • recruiting and hiring practice • rotation and promotion schemes • compensation packages • other benefit programs to employees • retention, firing and retirement policies • work rules and industrial relations agreements • policies for fringe workers . . . . . that benefit the firm.

Personnel management as a strategic issue • In Strategic Corporate Management I emphasized that every strategic issue revolves around the answers to four basic questions: • Who are the players involved? • What can each player do? • What does each one know? • What are the range of consequences for all the players from each pursuing its own strategy? • Thus all eight issues have important strategic aspects.

Recruiting and hiring • The main players are: • The candidates for the open positions • The recruiting firms competing for them. • Their choices revolve around: • Continuing to search over a broader pool • Making and accepting the best offer so far. • The main consequences: • Further delays in beginning work • Keeping open the option of a better job match. • So far as information is concerned, candidate employees know much more about themselves than their potential employers, and vice-versa.

Lecture summary The rationale for analyzing personnel management within the U.S. economy is that on a global scale, the U.S. labor market is educated, big, and growing. One of the most important ways of managing employees in the free modern world is to incentivize them . There is abundant evidence that employees rationally respond to incentives they face. Personnel strategy brings the tools of strategy to personnel management. We conducted experiments to explore how job matches are made and incentives are created to achieve equlibrium in the labor market.

Personnel Strategy 45-971