Raginee Baruah

5.1 Summary of main findings

In this dissertation, I focus on the employee selection strategies engaged by firms given their different needs and contexts. In the three studies of this dissertation, I examine three different aspects of the employee selection process—recruitment channels, stock-based compensations, and resource-intensity (and direction) of the selection process.

In the first study (Chapter 2), I examine the complementarity between the recruitment strategy (in terms of recruitment channels) and compensation design (fixed pay versus incentive pay). I show, using an analytical model, that formal recruitment channels succeed in attracting more motivated workers than informal recruitment channels because of a higher application cost associated with formal channels than with informal channels, and that this is especially valuable when attracting workers into fixed-pay contracts. At the same time, firms benefit from offering fixed-pay contracts when they can select highly motivated workers. Thus, I show that fixed-pay and formal recruitment channels are complements—implying that the benefits of using fixed-pay contracts increase by using these recruitment channels and vice-versa. This study therefore provides important insights into the interrelation of input-based and output-based controls and has important implications for the design of recruitment strategies and compensation contracts in practice. In particular, firms that successfully align these practices can reap a productivity premium due to a more efficient match between their recruitment and compensation practices. These results also inform practice how firms can deal efficiently with the incentive problem in the absence of monetary incentives.

In the second study (Chapter 3), I investigate into the use of stock-based pay to sort Chief Executive Officers (CEOs) at the time of appointment when there is informational asymmetry about their fit in the firm. Using longitudinal data on S&P 500 companies for the period 2011-2017, I find that contracts offered at the time of appointment have a higher share of stock-based pay relative to fixed-salary (and in total compensation) when there is more severe informational asymmetry about the CEO’s fit in the firm. However, I find that this variation in the share of stock-based pay across different types of appointments (with variation in the degree of informational asymmetry) disappears over the CEOs’ tenure, after controlling for all firm and CEO characteristics.

In the third study (Chapter 4), I examine the complementarity between resource-intensity of the employee selection process and training investments in a firm. Using cross-sectional survey data of 457 firms across Austria, Germany and Switzerland, I find a strong positive relationship between investment in training and in employee selection. Most importantly, I find that the complementarity between training and employee selection across all firms in the sample are driven by the need to select employees based on both the attributes of stability of the employee, and ability of the employee (innate or previously acquired). In addition, I also find that this positive relationship between employee selection and training investment gets stronger with increasing creativity-dependence, especially in firms involved in R&D activities and those operating in the creative industries. Interestingly, I find that in the sub-sample of creative industries, the specific attribute that is prioritized when there is high creativity-dependence is the extent of value congruence between the employee and the firm, over any other attribute. On the other hand, the degree of fit in an existing team is very important in the non-creative industries when there is high creativity dependence.

5.2 Contribution and implications

The three studies of the dissertation contribute to the important, yet understudied, body of literature on the importance of employee selection processes and their role in various contexts. The research questions explored in this dissertation are crucial in understanding the various hiring strategies we observe in practice in the current times. The contribution of each study is discussed, in details, in the respective chapters. I highlight the important ones here.

The first study (Chapter 2) makes a very important contribution to the management accounting literature that focuses on personnel controls by drawing attention to the first stage of the employee selection process—the stage of attracting the relevant applicant pool from which employees are selected subsequently. While most studies have concentrated on subsequent stages of selection (such as screening), this study emphasizes the importance of the having the relevant applicant pool in the first step before proceeding to subsequent stages of selecting these applicants. In addition, this study formalizes (through the analytical model) the relative benefit of using formal channels over informal channels when there are fixed-pay contracts (and conversely, using informal channels when there are incentive-pay contracts). Contrary to the intuition that informal recruitment channels might be better suited to identify highly intrinsically motivated employees, the study shows that firms tend to rely on formal recruitment channels that pose high hurdles on their prospective employees at the time of applying (to discourage less motivated candidates from applying) when the provision of incentives is infeasible. Conversely, the results also imply that if firms tend to rely on formal recruitment channels for other reasons, less (costly) incentives would be needed to induce the same amount of effort, irrespective of their feasibility. The results from the study can be very helpful in understanding why firms tend to rely more on certain types of recruitment channels over others depending on the output contractibility environment. But most importantly, it provides a solution to firms by showing how to attract employees who are willing to perform to the best of their abilities even when paid fixed wages.

The second study (Chapter 3) provides empirical evidence to a possible sorting explanation behind the variation in the share of stock-based compensation in contracts across CEOs. Most of the existing multi-disciplinary literature that focuses on the sorting role of stock-based pay at the top executive level are theoretical studies and there is a paucity of empirical studies on the topic. This study fills this gap by bringing some empirical evidence in support of the sorting theory. In addition, the study also provides an additional perspective to a long-standing debate on the justification and efficacy of using stock-based compensation. While most of the debate oscillates between the incentive story (risk-insurance tradeoff) and rent-seeking story (strongly linked to governance structures), this study is one of the first to provide another perspective, namely, a sorting perspective. One of the most important implications of the findings of this study is that the efficacy of using compensations (with its various components) must be judged using a broader lens to encompass other possible explanations such as sorting and moving beyond the widely debated view of incentives versus rent-seeking. By showing that the share of stock-based pay in compensation is strongly (positively) associated with the severity of informational asymmetry around a CEO’s fit in a firm at the time of appointment, the study emphasizes that the use of stock-based pay for sorting also depends on the (relative) need for sorting, which can be high with severe informational asymmetry. The results of the study are not only relevant for firms who are exploring the various tools for addressing their adverse selection concerns, but also to regulatory bodies who are constantly judging the increasing use of stock-based pay in CEO compensation.

The third study (Chapter 4) of the dissertation is one of the first empirical studies to examine what firms look for in their employees when they invest in training these employees. Existing studies have tried to reconcile their observation of a positive correlation between resource-intensity of employee selection and training with their theoretical models that rely on the need for stability and trainability of the prospective employee as the driving force for this observed correlation. This study, on the other hand, directly tests if firms are indeed looking for stability and trainability of the employees at the time of hiring. The study makes a very important contribution to the existing