Center for Corporate Performance
Publications based on collaborative projects with corporate partners
Abstract: The career prospects of newly recruited employees differ substantially within an organization. The stars experience considerable growth in earnings; others can hardly maintain their entry salaries. This article sheds light on the mechanisms generating the observed heterogeneity in earnings growth by investigating the effects that explicit short-run incentives and implicit incentives have on earnings growth. The model’s predictions are tested using personnel records from a large bank and are found to be consistent with the observed earnings growth during the first half of the employees’ careers.
Frederiksen, A. & Takáts, E.: Promotions, Dismissals, and Employee Selection:Theory and Evidence, The Journal of Law, Economics, & Organization, Vol. 27, No. 1
Abstract: Firms offer highly complex contracts to their employees. These contracts contain a mix of incentives, such as fixed wages, bonus payments, promotion options, and dismissals or threats of dismissal. In this article, we show that firms having a production process that is sensitive to employee quality may find it optimal to combine cost-efficient incentives such as bonuses and promotions with dismissals. Based on this result, we derive a hierarchy of incentives. Furthermore, we demonstrate the close link between the optimal contract and the employee sorting and selection and use this to analyse the information conveyed in employment matches.
Frederiksen, A., Hansen, T. B. & Frederiksen, N.: Vidensbaseret beslutningstagning, Ledelse & Erhvervsøkonomi, nr. 04, 2009
Abstract: Employees are a company’s most important asset. Hence it is essential that companies use the information available about their employees optimally to learn about employee behavior and to optimize their use of human resources. In this article we present a job separation study using Danske Bank personnel files, performance evaluations and employee job satisfaction surveys. The analysis illustrates how firms applying quantitative HR can transform information about their employees into an improved assessment of expected employee job separation probabilities and by that remove a substantial part of the uncertainty faced by HR department. Further, we discuss how the newly acquired knowledge allows the HR department to engage in more tactical and strategic decisions.
Frederiksen A.; Lange, F.; Kriechel, B.: subjective performance evaluations and employee careers
Abstract: Firms commonly use supervisor evaluations to assess the performance of employees who work in complex environments. Doubts persist whether their subjective nature invalidates using these performance measures to learn about careers of individuals and to inform theory in personnel economics. We examine personnel data from six large companies and establish how subjective ratings, interpreted as ordinal rankings of employee performances within narrowly defined peer-groups, correlate with objective career outcomes. We find many similarities across firms in how subjective ratings correlate with base pay, bonuses, promotions, demotions, separations, quits and dismissals and cautiously propose these as empirical regularities.
Smeets, V., Waldman, M. & Warzynski, F.: Performance, Career Dynamics and Span of Control, Working Paper
There is an extensive theoretical literature based on what is called the scale-of-operations effect, i.e., the idea that the return to managerial ability is higher the more resources the manager influences with his or her decisions. This idea leads to various testable predictions including that higher ability managers should supervise more subordinates, or equivalently, have a larger span of control. And although some of this theory’s predictions have been empirically investigated, there has been little systematic investigation of the theory’s predictions concerning span of control. In this paper we first extend the theoretical literature on the scale-of-operations effect to allow firms’ beliefs concerning a manager’s ability to evolve over the manager’s career, where much of our focus is the determinants of span of control. We then empirically investigate testable predictions from this theoretical analysis using a unique single firm dataset that contains detailed information concerning the reporting relationships at the firm. Our investigation provides strong support both for the model’s predictions concerning wages, wage changes, and probability of promotion, and also for the model’s predictions concerning span of control including predictions derived from the learning component of the model. Overall, our investigation supports the notion that the scale-of-operations effect and additionally learning are important determinants of the internal organization of firms including span of control.
Warzynski, F., Smeets, V. & Halse, N. A.:Case Study: Equal Pay the Headquarters of Novo Nordisk, WorldatWork Journal, Fourth Quarter, 2007
This paper provides an example of collaboration between a company and academia. The collaboration investigated the efficiency of salary systems that ensure equal pay in a company committed to eliminating gender bias. The analysis’s main findings follow. First, the estimated wage differential between men and women is about 2 percent once controlled for experience, age, education and occupation. Moreover, this wage differential declined from 3 percent to 2 percent between January 1997 and May 2004. Second, controlling for other factors, there appears to be a declining bias toward men for the promotion to manager during the study’s first period (January 1997 to July 2001), but no bias for the other promotions. This bias is reduced from 25 percent to 3 percent when controlling for the job category before promotion during the first period. Moreover, this bias has almost entirely disappeared, decreasing from 3 percent to1.9 percent between the first and second period (September 2001 to May 2004).
Smeets, V. & Warzynski, F: Too many theories, too few facts? What the data tell us about the link between span of control, compensation and career dynamics, Labour Economics 15 (2008) 688–704
In this paper, we use a unique personnel dataset from a large European firm in an high tech manufacturing industry that provides information about hierarchical relationships. This unusually rare feature allows us to identify the chain of command. We provide a few stylized facts about the link between
span of control, compensation and career dynamics and relate our findings to the existing theoretical literature of hierarchies in organizations: the assignment model, the incentives model, the information processing model, the supervision model, and the knowledge-based hierarchy model. We observe an increase in the span, an increase in wage inequality between job levels, and the introduction of a new hierarchical level. We also find that higher spans of control are associated with higher wages. The knowledge-based hierarchy provides the most likely explanation for these results when communication costs are decreasing. However, we also find evidence of learning and reallocation of talent within and across job levels, a finding that can not be explained by a static model of knowledge based hierarchy but rather by dynamic models of careers in organizations. Finally, we provide a few suggestions to enrich the existing theoretical literature and reconcile it with the facts.
Halse, N. A., Smeets, V. & Warzynski, F: International Differences in Subjective Performances, Compensation and Career Dynamics in a Global Company, Working Paper
In this paper, we use confidential personnel records from a large multinational firm to study the differences in subjective performance evaluation and their consequences across countries. We focus our analysis on three different sets of countries: Europe (where the headquarter is established), U.S. and Asia (Japan and China). We try to understand why performance evaluation is distributed differently across countries, and how these differences affect wage growth, the size of the bonus and promotion decisions. We find that evaluations tend to be better on average at the headquarter, but also that wages, bonuses and promotion decisions are less sensitive to performance, therefore diminishing the strength of the incentive mechanism behind performance evaluation. We document how learning about managerial ability occurs through repeated observations. We then discuss the long run implications of these differences on career dynamics and the policy implications for the firm if it wants to implement a consistent human resource policy across countries.
Job satisfaction and employee turnover: A firm-level perspective
In this article I study how companies can use their personnel data and information from job satisfaction surveys to predict employee quits. An important issue discussed at length in the article is how employers can ensure the anonymity of employees in surveys used for management and human resources (HR) analytics. I argue that a simple mechanism whereby the company delegates the implementation of job satisfaction surveys to an external consulting company can be optimal. In the subsequent empirical analysis, I use a unique combination of firm-level data (personnel records) and information from job satisfaction surveys to assess the benefits for companies using data in their decision-making. Moreover, I aim to show how companies can move from a descriptive to a predictive approach.
Supervisors occupy central roles in production and performance monitoring. We study how heterogeneity in performance evaluations across supervisors aects employee and supervisor careers and firm outcomes using data on the performance system of a Scandinavian service sector firm. We show that supervisors vary widely in how they rate subordinates of similar quality. To understand the nature of this heterogeneity, we propose a principal-agent model according to which supervisors can dier in their ability to elicit output from subordinates or in their taste for leniency when rating subordinates. The model also allows for variation in how informed rms are about this heterogeneity. Within the context of this model, we can discern the nature of the heterogeneity across supervisors and how informed firms are about this heterogeneity by relating observed supervisor heterogeneity in ratings to worker, supervisor, and firm outcomes. We find that subordinates are paid signicantly more, and their pay is more closely aligned with performance, when they are matched to a high-rating supervisor. We also find that higher raters themselves are paid more and that the teams managed by higher raters perform better on objective performance measures. This evidence suggests that supervisor heterogeneity stems, at least in part, from real dierences in managerial ability and that rms are at least partially informed about these differences. We conclude by quantifying how important heterogeneity in supervisor type is for workers' careers. Matching to a high rater (90th percentile) relative to a low rater (10th percentile) for just one year results in a 7 to 14 percent increase in the present discounted value of earnings over a full career at the firm.