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

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 2

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

5. Finware as functional organization 5

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 6

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

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) 8

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 9

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

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 11

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

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

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 14

15. IBM Credit’s Old Functional Organization Credit Department Contracts Department Pricing Department Documents Department General Manager 15

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

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

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 18

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 19

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 20

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

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) 22

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? 23

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 24

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 25

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 26

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 27

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 28

29. 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

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

31. Tradeoffs with Career Earnings Advantages – Efficiency wages reduce turnover and shirking – Since pay rises faster than MRP L 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 31

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 32

33. Indifference Curves Between Salaries and Fringe Benefits Fringe Benefits Monetary Compensation Utility = U 1 Utility = U 2 33

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

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

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. 36