Quản trị kinh doanh - Chapter 1: Setting hiring standards

Chapter 1: Setting Hiring Standards13/29/2020Chapter 1: Setting Hiring StandardsRisky workers exampleAnalysisDownside riskUpside potentialTermination costsRisk aversionLength of evaluationLength of employmentA CounterargumentAsymmetric informationFirm-specific productivitySetting hiring standardsBalancing benefits against costsForeign competitionThe method of productionHow many workers to hireOther factorsAvailability of workersFirm financial conditionMaking decisions with imperfect informationMake a decision independent of analysisEstimate the relevant informationExperimentSummary23/29/2020Chapter 1 – Hiring StandardsAfter completing this chapter, you will be able to answer the following questions:When should I hire low wage workers over higher wage workers?Should the skills of my workers change if my firm increases its investment in capital equipment?How many workers should my firm hire?What are the strategies for hiring risky workers?Are there special considerations for hiring uncommon skills?33/29/2020Risky Workers3/29/20204Risky HiresYou have a position to fill in a London investment bankConsider two candidatessalary = £100K; will work for the firm T yearsGupta predictably produces £200K per yearSvensen may be a “star” (50%), producing £500K; or a “lemon” (50%), losing £100Kignore discounting for simplicityassume the firm is risk neutral (is this a reasonable assumption?)They have equal expected productivity. Which is a better hire?53/29/2020Employees as Real OptionsHiring risk isn’t always bad! A risky hire is a “real option” if you can limit downside risk by firing “lemons”it might pay to hire a risky candidate even ifrisky candidate has lower expected productivity than safe candidatesthe firm is risk aversetermination costs are high“Hiring an Oddball”6GuptaNet = T•100KSvensen½½Retain for T yearsFire after 1st yearNet = T•400KNet = –200K½½Expected Net = (2T–1)100K3/29/2020Risky Hires are More Valuable the riskier the candidate(holding expected productivity constant)young candidates w/ less experiencenew positions the smaller the downside, larger the upsideif you are hiring a “portfolio” of people & can diversifythe lower are termination costscreative jobs with high upside potentialcreative / adaptable people if the firm can pay stars < their high Q but the market value of stars should (eventually) rise, so is that plausible?if switching jobs is costly to workersif stars are not easily identified by competitorsif productivity is firm-specific (see human capital lecture)73/29/2020DiscussionIf talent has great upside in your firm, structure recruiting & careers to exploit this could include:Turnover (may be helpful) to broaden talent pool & bring latest skillsfind ways to implement an “up or out” promotion systemstructure jobs for new hires to max opportunities to discover starsevaluate new hires carefully at probation (“partner”) stageconsider lowering selection standards at early stages83/29/2020DiscussionWhy are managers often reluctant to hire risky candidates?If you are a risky candidate, what might you do during an interview or negotiation?93/29/2020Hiring with Risk: One-Year DecisionExec SearchHire WilsonNet -$200KNet $14MHire JohnsonNet $3.5Mp = .5Expected Value of hiring Wilson ($6.9M) exceedsknown returns from Johnson ($3.5M)103/29/2020Hiring with Risk: Multi-Year Decision AExec SearchHire WilsonNet -$200KNet $7MHire JohnsonNet $3.5MFIRE AFTER 1 YEARRETAINp = .5Expected Value of hiring Wilson is $3.4M in first yearExpected Value over the six-year CEO tenure: EW = 3.4 + 5(7) = $38.4M vs. EJ = 6(3.5) = $21MNote: Average CEO tenure is six years113/29/2020Hiring with Risk: Multi-Year Decision BExec SearchHire WilsonNet –$2MNet $4.0MHire JohnsonNet $3.5MFIRE AFTER 1 YEARRETAINp = .5Expected Value over the six-year CEO tenure: EW = 1.0 + 5(4) = $21M vs. EJ = 6(3.5) = $21MNote: Average CEO tenure is six years123/29/2020Summary – Risky HiresThe younger the worker, the greater the potential value of the bet on that workerSometimes, it can pay to hire a risky worker even when his/her Expected Value is lowerThe existence of significant termination costs can move decisions toward the safer workerRisk is not a virtue – upside potential makes the payoff possibleBear in mind that the worker knows more about their potential than the prospective employer (Asymmetric Information)133/29/2020Risky Hires: Reality CheckDoes the Risky Hires model really work? How do we establish the conditions for exercising options on employment?Is it easily applied to other categories of employee besides CEO?Are any of the assumptions unrealistic?Can there be a spillover effect on morale?Where do we get real numbers?143/29/2020Capital vs. Labor 153/29/2020Capital vs. Labor Q: Output; K: Capital; H: HS Grad Labor; C: College Grad Labor; 0 < aH, bC, z < 1Case 1: Independent productivitySolution: Choose greaterCase 2: Dependent Co-workersSolution: H/C = aWC/bWHCase 3: Dependent Capital163/29/2020RECAP – Productivity HiringChoosing lowest Cost per unit of Output holds when production units are independent and have constant outputWhen individual contributions to output are diminishing and/or interdependent, an intermediate optimum may be appropriate Expenditures in capital equipment should be accompanied by review of optimal labor input 173/29/2020How Many to Hire3/29/202018Example – Marginal AnalysisPablo owns a startup landscaping business that has grown rapidly due to his excellent workHe has a added six gardeners, whom he pays a generous wage of $100 per dayAlthough he is pleased that his business has expanded rapidly, he remains very concerned about ever having to let anyone goBased on the table, what should Pablo do?193/29/2020Example – Marginal AnalysisNumber of WorkersTotal Daily SalesMarginal Value of WorkerTotal Labor CostMarginal Cost of Worker1500500100100295045020010031350400300100417003504001005200030050010062250250600100724502007001008260015080010092700100900100102750501000100112800501100100203/29/2020 NET REVENUE213/29/2020Example – Capital ExpenditureIn a foreign country, college graduates making $10/hr cost twice as much as high school grads Firm currently uses machines that cost $100 per day and hires high school graduates because cost per unit of output is the same as college graduatesNew machinery can double output with a cost of $160 per dayQuestion: Should the firm continue its policy of hiring high school graduates? 223/29/2020Making Decisions with Imperfect InformationInformation may be insufficient due toThe cost of gatheringThe timeliness of gatheringThe difficulty of obtainingOften (usually) decisions are made with incomplete information and analysisKeep in mind that some attempt is better than none at allManagers may gather an estimate relevant data or conduct experiments to gather dataConsiderations before conducting an experiment include:What do we want to learn and why do we need to know it?Will the answer have a large or small impact on profit?What kinds of data are needed and how much will they cost?Is the data likely to be reliable (risk)?233/29/2020RECAP – Ch 1Optimum hiring choice depends on the ratio of output to wageWhen worker productivity is enhanced by capital investment, higher-skilled workers can leverage the investmentUse marginal value to determine the number of workers to hireFactoring-in risk can inform hiring decisionsIn thin or volatile markets, additional factors may play prominently243/29/2020