Essays On Personnel Economics

This dissertation is a collection of three essays on personnel economics. The first essay studies bonus payments in a hierarchical firm. A well-documented finding in the internal labor markets literature is that the size of bonus payments increases as one moves up the corporate ladder. Two existing theories that can be used to explain this finding cannot fully capture the empirical patterns of the size of bonus payments. I develop a unified framework that can better match the empirical findings. Using a dynamic tournament model augmented with an asymmetric learning structure in which the current employer has an informational advantage over its competitors regarding the worker's productivity, my model offers an economic rationale for the employer's decision on the size of bonus payments by identifying two counteracting mechanisms that determine bonuses. Specifically, the size of bonus payments increases with the level of effort the employer aims to induce, but decreases with the size of the worker's career-concern incentives. I test the model's predictions using data from the personnel records of a medium-sized firm in the financial services industry. The results provide direct evidence for the model's predictions. The second essay investigates how salaries and bonus payments are related to turnover. In contrast with the existing literature, this study treats bonus payments as a distinct type of compensation, rather than aggregating them with salaries. The first part of the empirical analysis focuses on data coming from the personnel records of a medium-sized U.S. firm. I find that earning a bonus in the current period, as well as the size of the bonus, is negatively related to the probability of turnover after controlling for the size of salary or the growth rate of salary. These results also indicate that the growth rate of salary is negatively related to turnover, while results concerning the effect of the size of salaries are mixed. The second part of the empirical analysis uses a sample drawn from the Panel Study of Income Dynamics (PSID). The results show that salary, both in terms of size and growth rate, has a negative effect on the probabilities of quits and layoffs; whereas the negative effect of bonus payments is more evident in layoffs than quits. This third essay examines conditions under which employee referrals serve a screening function. Unlike the existing theoretical work, the possibility of a conflict of interest arising between the firm and current employees during the referral process is investigated. I consider two potential mechanisms that lead to a conflict of interest. First, I examine how the employee's social connections relate to his referral decision. I show that the employee finds it optimal to refer applicants with whom he has a strong social connection rather than applicants of high ability. Second, I examine how the employee's promotion prospects affect his referral decisions. Specifically, I posit that the current employee will have incentives to refer an applicant of lower ability if he faces any possibility of competition for promotions between himself and the newly hired worker. In either of these situations, employee referrals may not provide screening of more able workers. Finally, I show that the firm can make use of referral bonuses, which are contingent on the referral's performance, to align incentives of the employee with those of the firm.