1. This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004. Attracting & Retaining Employees  Principles: People won’t come to your firm until you make them at least as well of as the could be elsewhere 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

2. This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004. Chapter Organization  No-frills Competitive Labor Market  Some complications Human Capital Compensating Differentials Costly Information Internal Labor Markets The Salary-Fringe Benefit Mix

3. This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004. 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

4. This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004. Basic Competitive Model Number of Employees E Wage in $ Marginal Revenue Product of labor Market Wage Rate E*

5. This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004. Human Capital  Terminology Human Capital Investment in Human Capital “rate of return” on Human Capital  Types of Human Capital General Specific

6. This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004. Compensating Differentials  Consider 2 jobs Job X pays $8/hour in clean, safe working conditions Job Y pays $8/hour in a dirty, noisy factory  Is this an equilibrium wage?

7. This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004. 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.

8. This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004. 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

9. This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004. Costly Information  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

10. This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004. 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

11. This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004. Internal Labor Markets  Hire at entry level, promote from within 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

12. This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004. Tradeoffs in Long-Term Employee Agreements  Advantages 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

13. This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004. Pay in Internal Labor Markets Tenure with the firm Salary Compensation Marginal Revenue Product of Labor

14. This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004. 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 Much time may be spent lobbying managers for promotions

15. This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004. 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

16. This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004. Indifference Curves Between Salaries and Fringe Benefits Fringe Benefits Monetary Compensation Utility = U 1 Utility = U 2

17. This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004. 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

18. This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004. Iso-Cost Lines Between Salaries and Fringe Benefits Fringe Benefits Monetary Compensation $50 K $20K $30K

19. This slideshow was written by Ken Chapman, but is substantially based on concepts from Managerial Economics and Organizational Architecture by Brickley Zimmerman & Smith, McGraw-Hill, 2004. 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.