Entry Barriers for Dedicated Workers
18 , 2017-08-31
I will consider who between headquarters (HQ) and local managers should have the authority to hire, through a simple three-level hierarchy model with HQ, local managers, and workers. This model helps us in understanding why HQ is reluctant to hire dedicated workers recommended by local managers. Personnel departments in HQ often have authority over human resource management (HRM), particularly in Japanese companies, because HQ can manage employees from the long-term and companywide perspective. Thus, local managers follow HQ’s decisions. The initiative of HQ, however, has a drawback when managers are more familiar than HQ with their local business and worker performance. In view of this information asymmetry, managers should be allowed to decide whom to employ and how many to employ. Here, I present a realistic situation in which HQ is reluctant to delegate authority to local managers even when HQ realizes that managers are relatively well informed regarding their local business and worker performance. In this model, HQ must consider the incentives of local managers and workers with the unverifiable measure of performance. Managers can observe worker performance but cannot provide any hard evidence on them to HQ. First, I consider a situation in which managers are assessed vis-`a-vis their branch profit. In this case, managers maximize their branch profit, and HQ confronts a serious hold-up problem. Even if workers are productive, managers would not pay informally promised bonuses to dedicated workers because managers can breach implicit promises. Workers can predict the upcoming situation and thus skimp on work. To provide incentives to workers in such a situation, HQ must not assess managers in terms of profit. If local managers are assessed via the revenue of their own local branches, managers would maximize revenue, not profit. Managers would not attempt to breach implicit promises, which could induce workers to work hard. However, one drawback remains. If managers are delegated the task of managing workers, they would hire surplus workers because managers do not consider payroll costs. HQ, therefore, would not delegate this authority. In other words, at the cost of managers’ information advantages, HQ decides how many workers are employed. The above results imply that HQ should mitigate the hold-up problem caused by the unverifiable measure of worker performance in order to enhance the hiring of competent and dedicated workers given managers’ information advantages.