Social Impact Bonds http://t.co/43koVqOPRW—
Political Line (@PoliticalLine) June 15, 2015
The costs of teacher tenure in the USA
18 Jun 2015 Leave a comment
in economics of education, labour economics, labour supply, law and economics, managerial economics, occupational choice, organisational economics, personnel economics, rentseeking, unions Tags: employment protection laws
The Value of Steve Jobs
15 Jun 2015 Leave a comment
in entrepreneurship, industrial organisation, managerial economics Tags: CEO pay, superstar wages, superstars, top 1%
| Peter Klein |
As you have likely heard, Steve Jobs is taking an indeterminate leave of absence from Apple to deal with his continuing health problems. How will this affect Apple? How important is one person — albeit the founder and CEO — to a diversified multinational company with tens of thousands of employees? Apple’s stock slipped slightly on the news of Jobs’ leave (down 2.3 percent today, the first trading day after the announcement), but Jobs’s health problems are well known and Apple’s stock price presumably already included a discount reflecting the possibility he’d step down. To estimate the value of a particular employee to the firm in this way, we need an unanticipated departure, one that isn’t a response to poor performance and isn’t expected in advance.
Sure, enough, there’s an app for that — I mean, there’s a literature on that. An influential 1985 paper by Bruce Johnson, Robert Magee, Nandu…
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How to show the emergence of a working super rich while attempting to argue they are a rentier class
28 May 2015 Leave a comment
in financial economics, industrial organisation, managerial economics, organisational economics, survivor principle, theory of the firm Tags: CEO pay, Leftover Left, leveraged buyouts, market for corporate control, mergers and takeovers, superstar wages, superstars, Twitter left
The Washington Centre for Equitable Growth in a review of Thomas Piketty accidentally contradicted their own arguments about the emergence of the top 0.1%. They quote Piketty:
on page 302 of his book that the rise in labour income “primarily reflects the advent of ‘supermanagers,’ that is, top executives of large firms who have managed to obtain extremely high, historically unprecedented compensation packages for their labour.”
according to the Washington Centre for Equitable Growth:
these supermanagers were being vastly overly compensated given their questionable contributions to productivity.
The Washington Centre for Equitable Growth then goes on the argue that in 1979, most of the top managers worked for large, publicly traded firms but by 2005 more were working in closely held firms.
Who are today’s supermanagers and why are they so wealthy? equitablegrowth.org/research/today… http://t.co/Ts2OkOUk5g—
Equitable Growth (@equitablegrowth) December 03, 2014
I wish to explore this point about the biggest gains in both percentage terms and magnitude were among privately held business professionals and they are vastly overcompensated relative to their productivity. The key to the argument as explained in a link to a Robert Solow article by the Washington Centre for Equitable Growth is:
Piketty is of course aware that executive pay at the very top is usually determined in a cosy way by boards of directors and compensation committees made up of people very like the executives they are paying.
Piketty is equally direct about the ability of top managers to set their own pay:
It is only reasonable to assume that people in a position to set their own salaries have a natural incentive to treat themselves generously or at the least to be rather optimistic in gauging their marginal productivity.
Emmanuel Saez is less coy:
…while standard economic models assume that pay reflects productivity, there are strong reasons to be sceptical, especially at the top of the income ladder where the actual economic contribution of managers working in complex organizations is particularly difficult to measure. In this scenario, top earners might be able partly to set their own pay by bargaining harder or influencing executive compensation committees.
When arguing that the optimal top income tax rate is 83%, Piketty, Saez, and Stantcheva push for that high top tax rate in part because top executives are more likely to bargain for higher pay when tax rates are lower and receive funds that might go elsewhere within the firm.
Emmanuel Saez and Gabriel Zucman explore the new wealth divide in the U.S. equitablegrowth.org/research/explo… http://t.co/WKJKAigAPN—
Equitable Growth (@equitablegrowth) October 24, 2014
The only comment I could find on the increasing number of privately held companies that pay top executives so well is frustration by the Washington Centre for Equitable Growth that it complicates statistical collection. No other analysis is undertaken.
Xavier Gabaix and Augustin Landier found back in 2008 that what a major company’s CEO earns is directly proportional to the size of the firm that they are responsible for running. Executive compensation closely track the evolution of average firm value. During 2007 – 2009, firm value decreased by 17%, and CEO pay by 28%. During 2009-2011, firm value increased by 19% and CEO pay by 22%. Xavier Gabaix and Augustin Landier also found that compensation for executives has risen with the market capitalization. From 1980 to 2003, the average value of the top 500 companies rose by a factor of six. Two commonly used indexes of chief executive compensation show close to a proportional six-fold matching increase.
What intrigued me about this casual reference to the great number of super managers employed by privately held firms is the argument that they have a cosy relationship with their board of directors immediately collapses. That argument about executive pay is usually in the context of the separation of ownership from control. In large publicly held companies the executives are subject to less scrutiny by shareholders as few of them have a large enough individual stake in the company to gain from the extra effort of monitoring their pay packages.
When the pay packages of top executives is questioned, it is always pointed out that there is an easy way to test for whether top executives cheat shareholders by overpaying themselves.
This simple test is comparing the pay of large private companies and public companies with a large or a few share holders with public companies with diffuse share holdings. Private equity typically also pay its top executives very well, even though the capacity to dupe public shareholders are not a factor.
Privately owned companies and public companies with a few large shareholders can easily keep track of the pay packages of the executives and the board of directors hired to monitor them. Private equity ownership have high pay-for-performance but also significant CEO co-investment.
The standard argument for excessive compensation for CEOs is free rider problems prevent shareholders from doing sufficient monitoring of executive compensation practices, and that the problems have been getting worse over time. For example, in a classic paper, Bebchuk and Fried (2004) argued that executive compensation is set by CEOs themselves rather than boards of directors on behalf of shareholders,
This argument does not apply to private companies with a few shareholders but they still offer large pay packages to their top executives. Companies, be they public or private that pay any employee more than they contribute risks takeover and loss of market share and failure through higher costs.
The burst of takeovers and leverage buyouts in the 1980s were partly driven by opportunities to profit from reducing corporate slack and downsizing flabby corporate headquarters of large publicly listed companies. Cleaning out the overpaid executives and overstaffing in the headquarters of large corporations was an express purpose of these takeovers and leveraged buyouts.
The response of the Left over Left of the day was support regulation to stop these mergers and takeovers rather than applauding them as giving lazy, overpaid top executives a kick up the backside and from the boot out the door. This regulation to make hostile takeovers more difficult undermined the market the corporate control rather than strengthened it as Michael Jensen explains:
This political activity is another example of special interests using the democratic political system to change the rules of the game to benefit themselves at the expense of society as a whole.
In this case, the special interests are top-level corporate managers and other groups who stand to lose from competition in the market for corporate control. The result will be a significant weakening of the corporation as an organizational form and a reduction in efficiency.
Central to the hypothesis of the Twitter Left of CEOs overpaying themselves is there is free cash within the business they pocket in pay rises, fringe benefits and lavished corporate headquarters rather than pay out in dividends or invest in profitable investments.
CEOs with high pay packages are now much more likely than 20 or 30 years ago to be employed in private companies where the shareholders have far greater opportunities to ensure they get value for money.
All modern theories of the focus in part or in full on reducing opportunistic behaviour, cheating and fraud in employment and commercial relationships. The market for corporate control, and mergers and takeovers realise large benefits from displacing underperforming manager teams. Premiums in hostile takeover offers historically exceed 30% on average. Acquiring-firm shareholders on average earn about 4% in hostile takeovers and roughly zero in mergers.
Another reason for high CEO pay in both public and private companies is CEOs tend to be more risk adverse than their shareholders. The shareholders in any one company has a diversified portfolio and protected by limited liability if the company fails because of a risky venture. Moreover, shareholders receive nothing in dividends if the company breaks even so they would prefer that managers pursue business ventures likely to do more than break even.
The agent principal conflict ears as long as the company breaks even, the CEO gets paid. Out of career concerns, a CEO does not want to be at the head of a company that fails because his re-employment prospects are quite grim. High-risk/high-reward ventures are less attractive to top executives because if they fail, their human capital that is specific to the failed company is worthless elsewhere.
To encourage CEOs to take risks, paying them were share options makes them more interested in risky ventures because their pay goes up in line with the risks they take which they would otherwise not take but for option being paid in options. Privately owned companies are well aware of this risk aversion among their chief executives which is why they pay them so well and often in share options and bonuses for taking risks.
The Washington Centre for Equitable Growth simply did not address the reasons for privately owned companies paying the top executives so well.
The incomes of executives, managers, financial professionals, and technology professionals who are in the top 0.1% is very sensitive to stock market fluctuations. This volatility in the pay of CEOs is inconsistent with the notion that their pay is linked to their ability to form cosy relationships with the boards of directors rather than with their performance.
These top 0.1% CEOs are working super rich whose fortunes rise and fall with the businesses they direct. Top CEOs are paid so much more because they direct the fortunes of large enterprises. In such cases, a small amount of extra talent is worth because the benefits of that small amount of extra talent are spread over such a large firm.
The reason why I am sceptical about team bonding exercises
19 May 2015 Leave a comment
in economics of media and culture, managerial economics, organisational economics, personnel economics Tags: hold my beer
Are 40% of workers on zero hours contracts, almost?
12 May 2015 1 Comment
in labour economics, labour supply, managerial economics, organisational economics, personnel economics, politics - Australia, politics - New Zealand, politics - USA, theory of the firm Tags: zero hours contracts
4 in 10 hourly workers know their schedules just a week or less in advance brook.gs/1wkfkXW http://t.co/6JNkYlftjL—
Richard V. Reeves (@RichardvReeves) December 11, 2014
Zero hour contracts may be outlawed in New Zealand–updated
13 Apr 2015 1 Comment
in entrepreneurship, industrial organisation, labour economics, labour supply, managerial economics, occupational choice, organisational economics, personnel economics, politics - New Zealand, survivor principle, unions Tags: Aaron Director, creative production, David Friedman, inherent inequality of bargaining power between workers and employers, Richard Epstein, Ronald Coase, The fatal conceit, The pretence to knowledge, zero hours contracts
In another triumph of the Socialist Left of the National Party, the supposedly centre-right New Zealand government is considering outlawing zero hours contracts:
ONE News can exclusively reveal the Workplace Relations Minister is leaning towards outlawing the contracts and other employment provisions that he sees as unfair…
The Minister of Workplace Relations said the most punitive aspects of zero-hour contracts will be banned:
Mr Woodhouse has previously said a ban of zero-hour contracts would be an overreaction, but signalled the outlawing of aspects including:
•Restraint of trade clauses that stop someone working for a competing business if an employer does not provide the desired hours of work.
•The cancellation of shifts at short or no notice.
One reason for this is to neutralise a wedge issue with the Labour Party. The labour parties in both New Zealand and United Kingdom plan to outlaw zero hours contracts.
The NZ Labour Party’s Certainty at Work private member’s bill would require employment agreements to include an indication of the hours an employee will have to work to complete tasks expected of them.
Aaron Director pointed out that there are many real world business practices that behave differently from the caricatures in textbooks and arouse suspicious responses from economists (as well as from lay observers including lay observers with no ideological agenda).
Director said that visions of market power dance their heads and some of these suspect practices have been regulated for reasons he attributed in a large part to intellectual laziness. Ronald Coase made the same observation about knee-jerk responses to perplexing new business practices:
One important result of this preoccupation with the monopoly problem is that if an economist finds something—a business practice of one sort or other—that he does not understand, he looks for a monopoly explanation.
And as in this field we are very ignorant, the number of ununderstandable practices tends to be rather large, and the reliance on a monopoly explanation, frequent.
Much of the lasting influence of Aaron Director and of Ronald Coase came from their ability to show that simple judgements about business practices often cannot withstand rigorous scrutiny.
The organisation of and the contracting practices in the labour market is not a complicated despite the best efforts of the Left over Left and unions to pretend that it is so, as Richard Epstein explains:
Labour markets are not characterized by tricky externalities. They do not pollute streams or require the creation of public goods.
They are not characterized by genuine breakdowns in information, as workers are in a position to observe the conditions of their employment on a day-to-day basis.
Left to their own devices, without explicit support from union activities, they will be highly competitive, and thus work hard to allocate scarce human capital to its most productive use.
Workers have the option to quit for higher wages, and employers can always seek out low cost techniques to reduce their labour costs. Any short-term dislocation for firms or individuals is more than offset by the overall increase in the system productivity, spurred in part by clear signals that should increase investments in human capital.
In the UK, the Work Foundation found that 80% of those on zero hours contracts are not looking for another job; only 26% wanted longer hours. This implies that 74% were content with their current work times arrangements.
Labour's zero hours myth breitbart.com/london/2015/04… http://t.co/M8JsW6NWSF—
Alex Wickham (@WikiGuido) April 07, 2015
The inherent inequality of bargaining power between employers and workers and the reserve army of the unemployed must not be all that they are cracked up to be these days if low paid workers have to sign legally enforceable restraint of trade agreements, which is a common complaint about zero hours contracts. The worker does not have guaranteed hours but must promise not to work for someone else in the same line of business.
Obviously, the few members of the reserve army of the unemployed lucky enough to have a low pay, insecure job that offers no regular hours have so many other job options that their employers must get them to agree not to quit and job-hop at will. Jobs must be readily available to low paid workers for otherwise why do employers insist on this restraint of trade in employment agreements?
If there is an inherent inequality of bargaining power between the bosses and the workers, why do employers seek restraint of trade agreements against these downtrodden workers who are supposed to have few options but to accept the miserable zero hours job offer before them?
The question that must always be asked is why do people deemed competent to vote and drive cars sign zero hours contract? What is in it for them – for the worker who signs these contracts – especially for workers who already have a job and are switching to a zero hours contract? David Friedman asked this question about the economics of restraint of trade agreements for employees:
…the employer who insists on an employee signing a non- competition agreement will find that he must pay, in additional wages or other terms of employment, the cost that the agreement imposes upon the employee, as measured by the employee and revealed in his actions.
It follows that the employer will insist on such an agreement only if he believes that its value to him is greater than its cost to the employee… The contract is designed, after all, with the objective of getting the other party to sign it.
If I am designing the contract and offering it to many other parties, that may put me in a position to commit myself to insisting on terms that give me a large fraction of the benefit that the contract produces. But it is still in my interest to maximize the size of that net benefit-which I do by only insisting on terms that are worth at least as much to me as they cost the other party.
If zero hours contracts are as bad as the Left over Left claim, the job quit rates for these contracts should be high, and people moving from existing jobs should be under-represented in this section of the labour force. If a worker already has a job, they have few reasons to sign up to such a purportedly poor job offer. Show me the evidence.
Unless we have a good idea about why firms are moving to zero hours contracts, which we don’t, and why employees sign these contracts rather than work for other employers who offer more regular hours of work, meddling in these still novel to the officious observer arrangements is risky.
Claudia Goldin on Gender Equality in the Labor Market
02 Apr 2015 Leave a comment
in discrimination, gender, human capital, labour economics, managerial economics, occupational choice, organisational economics, personnel economics Tags: Claudia Goldin, gender wage gap, wage gaps
The North–South theory of product life cycles
23 Mar 2015 Leave a comment
in comparative institutional analysis, entrepreneurship, industrial organisation, law and economics, managerial economics, organisational economics, property rights, survivor principle, theory of the firm Tags: entrepreneurial alertness, foreign direct investment, incomplete contracts, incomplete property rights, North-South product life cycle, product life cycles
Forecasts of the offshoring of service jobs, as an example, can be constituted into a theory of North-South product cycles. The North-South theory of the life cycle of products starts with their research and development and refinement by entrepreneurs in the advanced countries (the North) with some exporting (Grossman and Helpmann 1991a, 1991b). These innovations require resources to be invested with uncertain prospects of success. Entrepreneurs in the North compete to discover new technology-intensive products using the ample supply of R&D workers and human capital-rich workers in the industrialised countries (Grossman and Helpmann 1991a, 1991b).
As a new product matures and its production becomes more standardised, the bulk of its production can migrate to the less developed countries (the South) to take advantage of lower production costs, and these countries will become net exporters. In the South, entrepreneurs focus more on imitation. They invest resources in importing and learning the production processes developed and proven to be a success in the North (Grossman and Helpmann 1991a, 1991b).
The shifting of production of standardised products to lower-wage foreign locations will frequently be within the originating company via a foreign affiliate, because of uncertainties about property rights and contract enforcement institutions in the host countries, and only later to independent foreign firms (Antràs 2005). Within corporate hierarchies, the high-skilled managers in the developed countries will specialise in problem-solving and non-routine tasks. They will interact with middle managers and production workers in developing countries who perform the routine tasks (Antràs et al. 2006, 2008).
Contracts are typically incomplete either because they are difficult to write and/or because the court cannot enforce them. The World Trade Organization (2005, 2008) concluded that, for example, the location of offshored services depends on:
- labour costs,
- trade costs,
- the quality of institutions, particularly the legal framework,
- the tax and investment regime,
- the quality of infrastructure, particularly telecommunications, and
- skills, particularly language and computer skills.
Risks in contract negotiation and enforcement will influence which types of production is outsourced. Roughly one-third of world trade is infra-firm, and this intra-firm trade is concentrated in the capital-intensive industries because of the costs and risks of investing in contracting with arm’s-length suppliers (Antràs 2003). Considerations about R&D incentives, the availability of human capital and the quality of contract enforcement institutions weigh heavily on the development of new products and their initial and later locations of different stages of production.
Products are initially developed in the highly industrialised countries because their sophisticated legal systems allow contracts to be enforced. Even then, in industrialised countries, the difficulties of writing and enforcing complicated contracts over the quality of new products early in the product life cycle encourages firms to make those products internally within the firm. Early in the product life cycle, if sub-contractors were used for key imports, there would have to be continual renegotiation of contracts contracts to incorporate new innovations and learning by doing. As Antras says:
Global production networks necessarily entail intensive contracting between parties located in different countries and thus subject to distinct legal systems0
As the new product standardises, and product quality in consequence becomes easier to measure and contract over, initially the innovating firm will sub-contract within the industrialised country but in time will import from developing countries. In the first instance, these imports may be from affiliates established in the developing country to ensure greater control of product quality through direct ownership of the factory. As Antras says:
Firms contemplating doing business in a country with weak contracting institutions might decide to do so within firm boundaries to have more control.
The size and shape of the firm is a direct response to mitigate the costs of contracting over quality that is hard to measure and which is constantly changing early in the product cycle. By assigning ownership rights to the party undertaking the more important investment in quality early in the product life cycle, entrepreneurs and innovators can minimise the losses caused by lack of enforceable contracts over quality when quality is changing rapidly as the firm moves through the product life cycle.
Boeing blamed the delays on the delivery of the Dreamliner on an unwillingness of sub-contractors to stand by their contractual obligations. In response, Boeing acquired some of the key sub-contractors to ensure that they delivered as promised. This is a classic operation of the theory of the firm where the entrepreneur brings within the firm what is too expensive to transact on the market because of difficulties in measuring quality and defining and enforcing property rights over what has been contracted.
What if you could replace performance evaluations with four simple questions?
20 Mar 2015 Leave a comment
in industrial organisation, managerial economics, organisational economics, personnel economics, survivor principle Tags: Dilbert, performance reviews
at the end of every project, or once a quarter if employees have long-term assignments, managers would answer four simple questions — and only four. The first two are answered on a five-point scale, from "strongly agree" to "strongly disagree;" the second two have yes or no options:
1. Given what I know of this person’s performance, and if it were my money, I would award this person the highest possible compensation increase and bonus.
2. Given what I know of this person’s performance, I would always want him or her on my team.
3. This person is at risk for low performance.
4. This person is ready for promotion today.
via What if you could replace performance evaluations with four simple questions? – The Washington Post.
Utopia, you are standing in it! 
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