Picking from the top or shedding the bottom?

Personnel management, worker quality and firm productivity

Christopher M. Cornwell Ian M. Schmutte Daniela Scur

Department of Economics Department of Economics MIT Sloan

University of Georgia University of Georgia School of Management

December 13–14, 2018

Empirical Management Conference

Harvard Business School

Our Starting Point

• Distinguish management as a tool for:

• improved efficiency (size of the pie)

• improved rent capture (split of the pie)

• Considerable dispersion across firms in

• Productivity: [Hsieh and Klenow 2009; Bloom et al. (2012)]

• Compensation: [Card et al. (2013); Song et al. (2015); Alvarez, Benguria, Engbom, Moser

(2018); Lavetti and Schmutte (2018)]

• Workforce Composition: [Iranzo et al. 2005; Abowd et al. (2006)]

1

Motivation

• Scant evidence on connection between management and pay, hiring, and firing:

• How do firms assemble the workforce?

• Value of firm recruiting and retention practices [(Oyer and Schaefer 2011)]

• This paper: Relative importance of management practices for

• recruiting (picking the best)

• retention (shedding the rest)

2

Overview: Data from Brazil

We link three data sources

• Linked employer-employee data: Relacao Anual de Informacoes Sociais

(RAIS)2003–2013

• Management practices: World Management Survey (WMS) 2008, 2013

• Firm productivity data: Pesquisa Industrial Anual (PIA) 2003–2013

3

Our Approach

1. Identify managers and production workers in RAIS

2. Estimate, and rank managers and prod. workers by, AKM person effects

3. Document relationship between management structure, worker selection, and

productivity

4. Describe movements of workers into and out of poorly- and well-managed firms

4

Related

• Productivity Dispersion and Management

[Bloom et al. (2012),Boyd and Curtis (2014)]

• Team Production and Substitution

[Jager (2016),Hensvik and Rosenqvist (forthcoming),Gallen (2018)]

• Sorting and Matching

[Abowd et al. (1999), Card et al. (2013), Sorkin (2017), Lavetti and Schmutte (2018)]

• Direct Evidence on Management and Matching

[Bandiera, Guiso, Prat and Sadun (2015), Bender, Bloom, Card, Reenen and Wolter (2016)]

5

Overview: Results

1. Worker and manager quality are positively correlated with TFP.

2. Better managed firms capture a higher share of total employment over time.

3. Positive recruitment: better managed firms hire a larger share of their new

recruits from the top of the distribution of worker fixed effects.

4. Worker matching and retention: better managed firms fire less often and are

more selectively.

5. Promotion and retention practices show the strongest correlation with

production worker quality.

6

Data

RAIS (Relacao Anual de Informacoes Sociais): 2003-2013

• Collected from employers to administer social security payments

• Population: formal-sector jobs (∼50 million per year)

• Includes information on

• worker characteristics: education, experience, race, sex . . .

• job characteristics: occupation, wage, hours, tenure, . . .

• reason for separation, date of hire

• employer characteristics: industry, legal structure, size, location . . .

We use RAIS under an agreement with the Brazilian Ministry of Labor and

Employment.

7

Measurement of Worker Quality

• Manager “quality”: θMngr

• Prod. worker “quality”: θProd

yit = α + xitβ + θi + ψJ(i ,t) + εit .

• yit – log monthly wage of worker i at time t

• θi – worker effect

• ψJ(i ,t) – firm-specific contribution to pay

8

Distribution of Manager and Non-Manager Quality

0.5

11.

5D

ensi

ty

-2 0 2 4AKM worker fixed effect

Production workersManagers

9

World Management Survey: 2008, 2013

• Survey of management practices

• operations, performance, target-setting practices

• personnel practices

• 18 indicators with ordinal scores

• Score of 1: (“little/no formal management practices”)

• Score of 2 (“some informal management practices”)

• Score of 3: (“formal practices with some weaknesses”)

• Score of 4: (“established formal practices”)

• Score of 5: (“best practices, part of the culture of org”)

• We classify firms based on the methodological cutpoint score 3

• “informal practices” firms (below 3)

• “formal practices” firms (above 3)

10

Distribution of Management Scores

0.4

.8D

ensi

ty

1 2 3 4 5Management score

(histogram: overall management index; k-density curve: people management index)Note: The data in this graph is from the World Management Survey for Brazil and covers 675 firms interviewedin 2008 or 2013. The histogram is of overall average management scores and the density curve is of peoplemanagement scores only.

WMS data, BrazilDistribution of management

11

Compensation Practices, Management Quality, and Employment Outcomes

Component Correlations

Variables Mean Std. Dev. Management ψ ¯θ

Management (z-score) 0 1 1.000

Firm effect: ψ 0 1 0.439 1.000

Worker effect: ¯θ 0 1 0.392 0.603 1.000

Firm size (employment) 583 787 0.325 0.219 0.267

Share of employees with college degree 0.12 0.16 0.325 0.500 0.873

Hire rate 0.19 0.14 -0.054 -0.193 -0.154

Separation rate 0.22 0.13 -0.177 -0.251 -0.258

Average tenure (months) 59.30 30.25 0.113 0.338 0.293

Average hours worked (week) 43.56 1.32 -0.070 -0.273 -0.287

Share of white workers 0.69 0.28 0.026 0.124 0.277

Share of male workers 0.72 0.22 0.101 0.243 -0.013

Share of unionized workers (non-managers) 0.56 0.40 -0.108 -0.123 -0.099

12

PIA - Pesquisa Industrial Anual

• Industrial Survey of Manufacturing Establishments

• Design

• More than 30 Employees: Census

• 5-30 Employees: Random sample

• Information

• Longitudinal tracking

• Balance sheet

• Other economic variables

13

Findings

1. Consistent with the literature, worker and manager quality are positively

correlated with TFP.

2. Better managed firms capture a higher share of total employment over time.

3. Positive recruitment: better managed firms hire a larger share of their new

recruits from the top of the distribution of worker fixed effects.

4. Better worker matching and retention from lower separation rates.

5. Promotion and retention practices show the strongest correlation with

production worker quality.

14

R1: More Productive Firms Use Higher Quality Workers

9.5

1010

.511

11.5

12

Pro

duct

ivity

log

of v

alue

add

ed p

er e

mpl

oyee

-2 -1 0 1 2 3

Average employee fixed effect (standardized)

Overall PE Management PE Prod worker PE Tech worker PE

Note: productivity data from PIA, worker data from RAIS, management data from WMS. Raw data.N=108607. Both variables residualized by regressing the underlying variable on log employment.Binscatter by vingtiles of overall mean person effects.

15

R1: More Productive Firms Use Higher-Quality Workers

(1) (2) (3) (4)

ln(sales) ln(sales) ln(sales) ln(sales)

z-management 0.088*** 0.065*** 0.064*** 0.059***

(0.02) (0.01) (0.01) (0.01)

Z-Avg person effect 0.076***

(0.02)

Z-Avg prod worker effect 0.031** 0.028* 0.010

(0.02) (0.02) (0.02)

Z-Avg manager effect 0.078*** 0.076*** 0.053***

(0.02) (0.02) (0.02)

Share workers with college degree 0.05 0.05

(0.10) (0.10)

Z-Avg firm effect 0.098***

(0.02)

Family-owned -0.077** -0.099*** -0.098*** -0.098***

(0.04) (0.03) (0.03) (0.03)

Founder-owned -0.030 -0.068* -0.068* -0.050

(0.04) (0.04) (0.04) (0.04)

# Observations 773 663 663 663

# Firms 679 594 594 594

R2 0.96 0.97 0.97 0.97

Controls include: industry, log of capital, raw materials, and the number of employees.

16

R2: Better-Managed Firms Capture Larger Share of the Workforce

financialcrisis year

financialcrisis year

financialcrisis year.2

5.3

.35

.4

2003 2008 20132003 2008 20132003 2008 2013

Bottom tercile Middle tercile Top tercile

Empl

oym

ent s

hare

Year

17

R3: Firms with Formal Management Practices Hire Better Workers

low ability

high ability

financialcrisis year

low ability

high ability

financialcrisis year

0.5

1

2003 2005 2007 2009 2011 2013 2003 2005 2007 2009 2011 2013

Informal processes Formal processes

Shar

e

Panel B: Hiring shares

18

R3: Firms with Formal Management Practices Retain Better Workers

low ability

high ability

financialcrisis year

low ability

high ability

financialcrisis year

0.5

1

2003 2005 2007 2009 2011 2013 2003 2005 2007 2009 2011 2013

Informal processes Formal processes

Empl

oym

ent s

tock

sha

re (a

nnua

l)

19

R4: Firms with Formal Management Practices Match and Fire More Selectively

.05

.1.1

5.2

Firin

g ra

te

-1 0 1 2AKM person fixed effects

Informal proccessesFormal processes

Managers

.05

.1.1

5.2

Firin

g ra

te

-1 0 1 2AKM person fixed effects

Informal proccessesFormal processes

Production workers

20

R5: Selectivity is Driven by People Management

(1) (2) (3) (4) (5) (6)

z-pe FE z-pe FE z-pe mgr FE z-pe mgr FE z-pe labr FE z-pe labr FE

z-operations 0.131*** 0.034 0.252*** 0.137*** 0.090** 0.004

(0.042) (0.040) (0.041) (0.040) (0.044) (0.043)

z-people 0.079* 0.091** -0.005 0.007 0.085* 0.098**

(0.040) (0.038) (0.037) (0.035) (0.044) (0.042)

Firm controls No Yes No Yes No Yes

Industry controls Yes Yes Yes Yes Yes Yes

# Observations 955 955 955 955 955 955

# Firms 690 690 690 690 690 690

R2 0.249 0.324 0.267 0.360 0.217 0.273

21

R5: Selectivity is Driven by Talent Management

(1) (2) (3) (4) (5) (6)

Avg. wrkr FE Avg. wrkr FE Avg. mngr FE Avg. mngr FE Avg. prod. FE Avg. prod. FE

Talent Mindset 0.071** 0.086*** 0.040 0.059* 0.078** 0.091**

(0.035) (0.033) (0.035) (0.031) (0.038) (0.036)

Perf. Culture 0.053 0.022 0.045 0.008 0.042 0.016

(0.033) (0.032) (0.034) (0.032) (0.034) (0.033)

Talent Capacity -0.024 -0.014 -0.029 -0.018 -0.037 -0.027

(0.032) (0.031) (0.034) (0.032) (0.033) (0.033)

Talent Devel. -0.002 0.018 -0.031 -0.013 0.012 0.032

(0.039) (0.037) (0.038) (0.035) (0.043) (0.041)

Value Prop. 0.049 0.018 0.019 -0.015 0.043 0.016

(0.036) (0.034) (0.041) (0.037) (0.037) (0.036)

Retaining Talent -0.021 0.007 -0.040 -0.009 -0.007 0.017

(0.036) (0.036) (0.033) (0.033) (0.038) (0.038)

Firm controls No Yes No Yes No Yes

Industry controls Yes Yes Yes Yes Yes Yes

# Observations 955 955 955 955 955 955

# Firms 690 690 690 690 690 690

R2 0.255 0.327 0.272 0.362 0.223 0.277

22

Conclusions

Motivation: There is scant evidence thus far on whether personnel management structures

actually translate into real differences in pay, hiring and firing practices. We document these

base relationships as a first step in a broader agenda.

• We identify managers and production workers using occupation codes, and estimate

AKM person effects for each type of worker.

• We rank workers by their AKM person effects and identify the distribution of the

ranked person effects of workers in poorly- and well-managed firms.

• We document the relationship between management structures and pay, worker

selection (production and managers) and productivity.

• We document the flow of different worker types across poorly- and well-managed firms.

23

Thank you!

Ian M. Schmutte

schmutte@uga.edu

23

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URL: http://www.sciencedirect.com/science/article/pii/S016972181102418X