ICYMI: Personnel Economics

by Patrick L. Warren

In a continuing series, I want to mention another great session I attended at SIOE this year for people who either couldn't make it to Paris or had a conflicting session. This session, on personnel economics, was an interesting mix of theory and data that changed how I thought about personnel mangement and compensation systems. In addition to the three papers listed below, John de Figueiredo presented some really nice work on the gender wage gap in the U.S. federal civil service, but the paper/abstract is not yet available for public release. I commend this session to your attention (and not just because one of the papers is mine).


The Determinants of Managerial Productivity Around the World

Mitchell Hoffman , (University of Toronto) 
Matthew Bidwell, (University of Pennsylvania) 
John McCarthy, (Cornell University) 
Michael Housman, (HiQ Labs) 

Many companies collect surveys on employees about their managers. Do firms use such information to evaluate and compensate their managers, and should they be doing so? Using rich data from a multinational technology and services firm, we show that employee-surveyed manager quality is strongly associated with certain outcomes. Higher manager quality is associated with lower attrition, higher employee promotions, higher employee engagement, and more innovation, but does not seem to relate much to employee subjective performance scores. The attrition results are particularly strong and appear to be causal, as they are robust to different research designs including analyses exploiting manager moves across firm locations. Different manager characteristics matter for different worker outcomes, but one fairly important one seems to be managers setting clear expectations. While managers with better scores appear to improve employee outcomes, such managers appear to reap little reward either in compensation or promotion rates. These results suggest that managers are more strongly rewarded for other behaviors as opposed to good ``people management."

Paying for Creativity: the Effect of Piece-rate Vs. Time-rate Compensation on Quality of Work

Walid Hejazi, (University of Toronto) 
Brian S. Silverman, (University of Toronto) 
Brent Perekoppi, (University of Toronto)

Incentive-systems theory proposes generally that piece-rate compensation should yield higher quantity of output and, assuming that quality cannot be perfectly monitored, lower quality of output than time-rate compensation. But recent advances in psychology and behavioral economics suggest that such incentive compensation will elicit particularly poor quality results for non-routine tasks for which creative problem-solving is required. Using a unique database from the energy-related home services industry, we explore differences in quantity and quality outcomes between employee technicians who are paid a daily rate and contractor technicians who are paid by the job. Of particular interest, different job types require different levels of creative problem-solving, and calls are assigned to technicians independently of their compensation-scheme status. We find significant evidence that piece-rate workers indeed work faster and complete more jobs, with this advantage especially pronounced for routine jobs. We find mixed evidence regarding quality: piece-rate workers yield comparable quality for routine, low-creativity tasks, while their quality is significantly lower for high-creativity tasks. This study thus helps to reconcile prior results from conflicting theories.


An Equilibrium Theory of Retirement Plan Design

Ryan Bubb, (New York University School of Law) 
Patrick L. Warren, (Clemson University - John E. Walker Department of Economics) 

We develop an equilibrium theory of employer-sponsored retirement plan design using a behavioral contract theory approach. The operation of the labor market results in retirement plans that generally cater to, rather than correct, workers' mistakes. Our theory provides novel explanations for a range of facts about retirement plan design, including the use of employer matching contributions that result in cross-subsidization of rational workers by myopic workers, the use of default employee contribution rates in automatic enrollment plans that lower, rather than raise, workers' savings, and the inclusion of high-fee funds among plans' investment options. These equilibrium outcomes call into question the practice of depending on employers to design plans to counteract the mistakes of workers.