I analyze a standard employee selection model given two stylized institutional constraints: first, professional experience can perfectly substitute for a lack of formal education for insiders while this substitution is imperfect for applications from outside the firm. Second, due to increased legal risk, the respective "discount rate" applied to outsiders' professional experience increases with the advertised minimum educational requirement. The optimal selection policy then implies that the expected level of formal education is higher for outsider than for insider recruits. However, such recruits are only seemingly overeducated: in absence of these constraints restricting the signal value of education, the respective standards would be set higher and identically equal for both groups.
Moreover, the difference in educational attainments between the two groups of recruits increases with lower educational job requirements. These insider-outsider effects are very specific to our theoretic approach and are strongly supported by our empirical results. At the same time, the results are also generally consistent with previous empirical work on the over education effect on the probability to be hired from the external labor market. Yet, in strong contrast with the career mobility approach as the alternative theoretic framework, over education does not increase the hiring probabilities - i. e. enhance the promotion chances - of insider recruits.
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Our case concerns employee selection by a large US public employer that is subjected to constitutional restraints and self-regulated by manuals of fair employment practises. Currently, however, a set of similar regulations emerges in Europe: the Commission of the European Communities (2000) and the Council of Europe (2001) have initiated a process to establish the formal equivalence of educational degrees and professional experience gained in occupational training programs. This policy intends to foster lifelong learning and, mirroring the US disparate impact experience, to include population groups that are socially excluded from obtaining adequate education. The EU member states must establish systems of Accreditation of Prior Learning (APEL) that involve firms offering vocational training programs as well as non governmental organizations representing such disadvantaged groups.
The current states of implementation vary widely across the European countries. By virtue of the Validation Acquis Professionals (VAP) and the Validation des Acquis de l'Experience (VAE) decrees, however, french employees can already obtain a perfect university degree equivalent certificate without attending university at all.29 Such legal equivalence rules ultimately constitute binding constraints on employee selection processes in all firms, public and private. Thus, the rate of substitution between formal education and professional experience should be equalized between insider and outsider applicants. This development will reduce the over education effect on hiring probabilities. However, it then also reduces the predictor value of formal education and, consequently, precision in recruitment processes.
Article No. 2
How Changes in Compensation Plans Affect Employee Performance, Recruitment and Retention-An Empirical Study of A Car Dealership
Due to lack of access to objective, individual-level performance data, prior empirical studies of compensation schemes have only produced limited knowledge of how an incentive plan affects employees' selection of employment and effort level (Banker et al. 2001). In this study, we have used data at the individual and company levels to empirically test how a company's change to a less performance-sensitive compensation plan affected employee performance. Our results support the inference from economic theory that a switch to a less performance-sensitive compensation scheme hurts individual sales productivity. Also, we found more low-performance salespersons were attracted to the company and fewer high performers were retained.
Also, it is analyzed that employee groups most affected by the switch to a less performance sensitive plan. As predicted, we find that high-performance employees were affected more than low performance employees. Importantly, our results show that impacts are different among high performance employees, i.e., salespersons who received second-highest performance ratings were more affected by the plan switch than those with top ratings. Perhaps salespersons with highest ratings had stronger intrinsic incentive (e.g., better social status) and received status-related benefits (e.g., overseas travel, equipped with best cars) and thus placed less weight on sales-related compensation. These findings suggest that managers should anticipate impacts of alternate plans on the incentives and efforts of different employee groups (e.g., ones with different levels of ability) and refine the compensation contracts or take various actions to mitigate potential dysfunctional impacts.
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Furthermore, our results support the recruiting effect, i.e., the average sales productivity was higher for those hired under the old plan than for those hired under the new plan. Also, our results maintain the separation effect. We find that employees who were hired under the old plan and quit after the plan switch had lower average sales productivity than those who left before the plan switch. In addition, sales productivity was higher for those who were hired and left under the less performance sensitive plan than for those who were hired before the switch. Results from additional analyses show that separation occurs mainly when employees have poor performance, less experience, and more suffering from compensation loss. Hence, these results can help management anticipate that employees with certain characteristics will be more likely to leave if the compensation plan becomes less performance-sensitive. Taken as a whole, although our results support the predictions of economic theories (i.e., incentive and selection effects), some employee behaviors are better explained by organizational and behavioral theories (e.g., intrinsic incentive causes top salespersons to stay).
While this study has advanced our understanding about the effects of performance-based incentive schemes and their related management practices, it is important to recognize its limitations. In particular, like prior studies on changing incentive schemes (e.g., Banker et al. 1996; Lazear 2000; Banker et al. 2001; Brickley and Zimmerman 2001), our analysis was restricted to a large data set from one organization. Therefore, our results may not be generalizable to other organizations and contexts. Furthermore, although we have included both competitor performance and local competition intensity in our models, we do not have information about competitors' strategy, which may have also affected the performance of our research company.
Patronage or Merit? Bureaucratic Recruitment in19th and Early 20th Century Europe
I advance a theoretical model explaining a government's choice of the method by which to appoint bureaucrats. The model develops a reduced form representation of the exchange relationship underlying the patronage system. Since patronage requires some form of payment in exchange for once, it inevitably excludes some - potentially well-qualified - candidates from bureaucratic posts. The more qualified these officials, the more costly is patronage.
The model further advances claims regarding the effect of economic variables on bureaucratic selection. The higher the level of private wages and the greater the returns to skill in the private sector, the more likely merit-selection is to be adopted.
These findings are consistent with anecdotal evidence regarding the adoption of the merit system in 18th Century Prussia and 19th Century England. Prussia first adopted a system of examinations for judicial appointees in 1755 under Frederick II. According to Mueller, There can be no doubt that Frederick II would have liked to all vacancies ... with nobles if he could have found qualified men." But, since the nobility devoted the education of its sons nearly exclusively to warfare and looked down upon university training, such skilled members of the aristocracy could not readily be found. Thus, by 1770 Prussia established a Civil Service system and set of merit exams for all higher civil service positions, and made university training prerequisite in 1808 (Mueller 1984).
In England, the patronage system persisted for a longer time, restricting once to members of the aristocratic classes. Indeed, the middle classes greatly resented the system which had the effect of \shut[ting them] out of the material rewards of power."However, this system of appointment proved less costly for the English than for the Prussians, as the English gentry was deeply involved in higher education from the late 16th Century onwards (Mueller 1984). Indeed, England only adopted a competitive exam-based system of appointments for the domestic civil service in 1870, the effect [of which] ... was to open fresh avenues of employment to the professional class and to those outside it who had sufficient academic ability and determination to thrust their way in."
The predictions regarding the distribution of skills also receive support in cross-country time-series regressions using data from the late-19th and early 20th century period. In-creasing educational enrollments are associated with merit reforms, particularly when the politically advantaged class is small. While these results are quite preliminary, they offer support for the theory advanced.
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The introduction of merit recruitment indeed stems from a `leveling of social differences,' as first claimed by Weber nearly a century ago. This effect holds across a variety of political institutions. This paper was able to arrive at this insight by viewing bureaucratic politics from a comparative perspective, drawing upon evidence from a variety of institutional settings.
Article No. 4
Selection, Separation, and Unemployment
It proposes a new explanation for the unemployment rate disparity between skill groups. It is well documented that high-skill workers have lower unemployment rates. Data also show that the reason for the lower unemployment rate of high-skill workers is their lower probability of job separation. High-skill workers are less likely to separate from their jobs because they are selected more effectively. Firms do a more intensive and extensive employee search when hiring for high-skill vacancies in the data.
This paper uses a matching model with uncertainty about match quality to analyze the relationship between employee selection and job separation probability. There are two employee selection technologies that in their cost and effectiveness. In the equilibrium, high-skill _firms, which are the firms with higher productivity, self select into using more effective technology. As a result of the choice of more effective technology, a higher fraction of high-skill firms end up with good quality matches, thus a lower fraction of these firms experience endogenous match termination. Consequently, in equilibrium, high-skill workers have a lower unemployment rate compared to low-skill workers, as they have substantially low job separation rates.
High-skill firms choose the more effective technology as the output gap between good and bad quality matches for high-skill workers is high. It is not the output gap per se that makes firms choose effective technology, but the higher opportunity cost of hiring the wrong worker, which is the consequence of high output gap. One can also let the only ex-ante difference between high and low skill workers be the vacancy cost with high-skill firms having a higher cost. Note that, a higher vacancy cost also means a higher opportunity cost of hiring the wrong worker, since the _rm needs to incur high vacancy cost in the subsequent period if the match is of bad quality. In such an environment, we can have an equilibrium in which high-skill firms use the effective technology and thus have lower job separation rates. However, in such an equilibrium, the unemployment rate of high-skill workers will be higher, since they have a higher vacancy cost than but the same productivity as low-skill workers. Allowing for differences in both productivity and vacancy cost generates the same results as the model used in this paper does.
Future research will identify the importance of these factors, as well as possible others, on employers' choice of selection techniques for jobs with different skill requirements. There is more work that needs to be done to explore the skill bias in job separation probabilities. This paper focuses on the role of employee selection on job separation rates. Another possible reason is that learning about the match quality is slower for high-skill jobs. This will not only directly contribute to the lower job separation of high-skill, but also affect the employee selection procedures firms use.
The model abstracts from interaction across skill groups. For future work, it would be interesting to explore the effects of interactions across markets on employee selection technologies of firms. There are also other possible contributors to the bias, such as HRM special trainings, that should be explored.
Employee Selection as a Control System
The link between employee selection and better management control outcomes is a topic that has been the subject of considerable theoretical research across literatures as varied as accounting, economics, and organizational behavior. Yet, it is one for which little if any direct empirical evidence exists. By studying a setting in which there is a basic incentive alignment problem - motivating employees to use decision-making authority and to do so effectively - that is difficult to solve via measuring and contracting on output, I am able to provide direct evidence of this link.
The findings in this paper generally lend empirical support to emerging economic theories on preference alignment as a solution to contracting problems (Prendergast 2008, 2009), but patterns in the statistical and qualitative data from this organization suggest potentially useful modifications to these theories. In particular, these theories predict a type of conflict in organizations which rely on such mechanisms - as output becomes less contractible, organizations will increasingly hire employees who care about only one aspect of their job (e.g. service provision) while ignoring others (e.g. cost control). Thus, these theories paint a picture of extreme divergence of interests between management and employees in settings where output is non-contractible.
Yet, the quantitative and qualitative evidence presented in this paper demonstrate a setting in which employees appear to balance organizational interests in their decisions despite being highly motivated and directed to focus on service provision to customers and in the absence of strong explicit or implicit incentives linked to organizational performance. Employee comments in Appendix A as well as my own interviews and observation suggest that this arises, at least partially, because employees rather explicitly recognize the link between the organization's performance and their ability to continue to provide service in the future.
Thus, while employees may be intrinsically motivated to focus on one task (service provision) at the expense of others (cost control), their beliefs about the impact of ignoring the task for which they are not motivated on their ability to carry out the task for which they are motivated may lead them to at least partially internalize an organization's performance objectives. Building such beliefs into models of preference alignment as a solution to agency problems may yield novel predictions about the costs and benefits of relying on employee selection as a control system.
The empirical results and qualitative data presented in this paper also suggest a potentially fruitful avenue of future research in the accounting literature. One the one hand, the empirical results show employee selection as a solution to a fundamental accounting problem - the difficulty of defining and measuring output in a particular context. On the other hand, there are ongoing attempts at this field site to measure performance against many of its more intangible objectives. If the performance measure "design problem" can be solved, would we see organizations move away from preference alignment and back towards traditional performance-based incentive alignment? What are the potential consequences if any? Moreover, while not discussed in detail throughout the paper, this organization has increasingly turned towards formal measurement and monitoring of its employee selection.