ECON 308: Employment Decisions

1. ECON 308: Employment Decisions Chapters 13 Week 13: April 26-28, 2011

2. 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

3. Bundling Tasks into Job Subunits • Example: FinWare Financial Software Distributor Function Service Sales Task 1 Task 2 Individuals Customer Type Task 4 Firms Task 3

4. 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

5. Finware as functional organization

6. 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

7. Incentive Issues • Cost of monitoring • Broad Bundling and compensation (Faculty) • Teaching • Research • Incentive effects • Sales: Commission • Technicians: Customer Satisfaction

8. 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)

9. Bundling of Jobs into Sub-units • Group by Geography • Benefits • Decentralized decision making authority • Managers compensated on performance of division • Problems • May ignore interdependencies

10. Where Functional Subunits Work Well • Small firms • Homogeneous products • Stable underlying technology

11. 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

12. Matrix Organizations: Multidemensional Sales Division Service Division Business Products Team Business Sales Department Business Service Department Consumer Products Team Consumer Sales Department Consumer Service Department

13. Chrysler • Original: Functional • Revised: Product teams • Engineers • Finance • Marketing • Assembly line production • Ex. Moon-roof control on cheaper model

14. 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

15. IBM Credit’s Old Functional Organization General Manager CreditDepartment ContractsDepartment PricingDepartment DocumentsDepartment

16. IBM Credit’s Revised Organization General Manager Case Worker Case Worker Case Worker Case Worker

17. ECON 308: Employment Decisions Chapter 14 Attracting and Retaining Qualified Employees Week 13.2: Nov. 18 , 2010

18. 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

19. Chapter 14 Organization • No-frills Competitive Labor Market • Some complications • Human Capital • Compensating Differentials • Costly Information • Internal Labor Markets • The Salary-Fringe Benefit Mix

20. 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

21. Basic Competitive Model Wage in $ Market Wage Rate Marginal Revenue Product of labor E E* Number of Employees

22. 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)

23. 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?

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. Pay in Internal Labor Markets Compensation Salary Marginal RevenueProduct of Labor Tenure with the firm

31. 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

32. 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

33. Indifference Curves Between Salaries and Fringe Benefits Monetary Compensation Utility = U2 Utility = U1 Fringe Benefits

34. Iso-Cost Lines Between Salaries and Fringe Benefits $50 K Iso-cost line at $50,000 ($50K) of total payment Monetary Compensation Slope = -1 $50K Fringe Benefits

35. Optimal combination: Salaries and Fringe Benefits $50 K Monetary Compensation $30K $20K $50K Fringe Benefits

36. 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.