Strategic Business Program

1. Strategic Business Program Incentives and Human Resources Management Day 2 1

2. Incentives and Human Resources Management • Course Overview Day 2 • Hiring • Hiring considerations • Thinking about the option value of hiring • How do you choose the optimal types and quantity of employees for your firm? • How do you screen potential employees to get the most able and the best fit? 2

3. Competing, Recruiting, and Staffing Globally Globalization Approximately 70 to 85 percent of the U.S. economy today is affected by international competition. About 10 percent of what Americans produce every year, dollar-wise, is sold abroad. Impact of Globalization “Anything, anytime, anywhere” markets Partnerships with foreign firms Lower trade and tariff barriers NAFTA, EU, APEC trade agreements WTO and GATT 1–3

4. Demographic and Diversity Challenges Demographic Changes More diverse workforce Ethnic and cultural challenges Aging workforce More educated workforce Necessity of basic skills training • Managing Diversity • Being aware of characteristics common to employees, while also managing employees as individuals 1–4

5. Demographic and Diversity Challenges

6. Demographic and Diversity Challenges 1–6

7. Over the years, the educational attainment of the U.S. labor force has risen dramatically. The unemployment rate varies based on education. Demographic and Diversity Challenges 1–7

8. Unemployment rate, by education

9. Demographic and Diversity Challenges 1–9

10. Recruitment and Hiring • 25% of human resource professionals report a shortage of job candidates with degrees in science, engineering, technology and mathematics. • 78 million Baby Boomers will retire with only 46 million Generation X workers to replace them. • HR must be creative in searching for qualified employees. • Businesses look both internally and externally. 10

11. The recruiting function is perhaps the most critical and least attended-to facet of the employee hiring process. Small, growing businesses that lack experienced human resource management personnel tend to hire a person for a particular job rather than take an in-depth look at how well that individual would fit into the culture of the organization and whether or not she or he has the potential to grow with the company. Recruitment and Hiring

12. SKILLS Education, training, certification or licenses, etc. Previous experience Personal characteristics needed for the position, such as communication skills, mathematical ability, self-motivation, creativity, etc. EFFORT Physical strength and stamina needed Mental and visual concentration RESPONSIBILITY For supervising others For safekeeping of assets (equipment, money, information, etc) For public contacts WORK CONDITIONS Work environment (noise, cold, time pressure, hazards) Job Description

13. Advertising in the classifieds Recruiting at high schools, vocational schools, colleges, and universities Public employment offices Private employment agencies & headhunters Referrals from current employees and others in the industry Networking with local organizations Internet recruiting Temporary help services Employee leasing Where to find applicants

14. A resume is frequently embellished...the applicant wants to impress you! A resume doesn’t necessarily provide the specific information that you need to make a good selection. A resume may provide information to you which is illegal or discriminatory for you to consider Make sure your application form doesn’t ask illegal or inappropriate questions For both resumes and applications, it is important to verify the information reported. Over 40% of applications have at least one “puffed” claim. Applications and Resumes

15. Nondirective Interview The applicant determines the course of the discussion, while the interviewer refrains from influencing the applicant’s remarks. Structured Interview An interview in which a set of standardized questions having an established set of answers is used. Interviews

16. Situational Interview An interview in which an applicant is given a hypothetical incident and asked how he or she would respond to it. Behavioral Description Interview (BDI) An interview in which an applicant is asked questions about what he or she actually did in a given situation. Panel and Sequential Interview An interview in which a board of interviewers questions and observes a single candidate. Interviews

17. Open-ended questions provide more information than those that require short one- or two-word responses. Since experience, education, and basic skills are represented on the application, the interview should focus on clarifying any issues the application raised and getting at the character of the candidate. The interviewer should talk no more than 15-20% of the time and should take notes either during the interview or immediately after. Interviews

18. Illegal Questions

19. Testing Psychological tests (personality, etc) Performance tests (skill evaluation) Drug tests Physical examinations Checking References Require the applicant to sign a waiver Do it yourself - background checks Hire an independent firm Hiring

20. An individual is considered an EMPLOYEE if he/she... Must follow company instructions about where, when, and how to carry out the work Is trained by the company Provides services that are integrated into the business Provides services that must be rendered personally Cannot hire, supervise, and pay his or her own assistants Has a continuing relationship with the company Must follow set hours of work Works full time for a company Does the work on the company’s premises Must do the work in a sequence set by the company IRS 20 point test

21. An individual is considered an EMPLOYEE if he/she... Must submit regular reports to the company Is paid regularly for time worked, by the hour, week, or month Receives reimbursements for job-related expenses Relies on the tools and materials of the company Has no major investment in facilities and resources to perform the service Cannot make a profit or suffer a loss through the provision of these services Works for one company at a time Does not offer his or her services to the general public on a regular basis Can be fired at will by the company for reasons other than failure to produce specified results May quit work at any time without incurring liability IRS 20 point test

22. Civil Rights Act 1964 No discrimination on basis of race, color, religion, sex, national origin (15 employees) Age Discrimination Act of 1967 Over 40 years old (20 employees) Immigration Reform and Control Act of 1986 Checking applicants for legal right-to-work status (1 employee) Americans with Disabilities Act of 1990 Don’t discriminate against the handicapped Must make accommodation in the workplace (15 employees) Elliot-Larson Civil Rights Act of 1976 (Michigan) Race, color, religion, sex, ancestry, age, disability, HIV/AIDS, marital status, breastfeeding, height, weight, arrest record (1 employee) Labor Legislation

23. Hiring: The Firm’s Trade-off F Unattainable Profit C B A E Attainable but inefficient D Worker Compensation

24. High School vs. College

25. High School vs. College

26. High School vs. College • From chart on prior slide, who to hire? • Most cost effective can be more easily seen by the ratio of salary to output

27. International Comparisons See webpage http://www.bls.gov/fls/chartbook/2012/chartbook2012.pdf Compare and discuss page 30 and 31 vs page 41

28. International Comparisons

29. Productivity before hiring • How to measure workers’ productivity before hiring them? • Education and years of experience • These are the two most important measures of productivity • Typically explain about 20% of variation in wages

30. Risky workers • If can fire workers after learning their productivity (i.e. probation period) • If employment is likely to last beyond the time when firms discover workers’ productivity • Firms should hire: • A. Risky workers • B. Safer workers, who on average are likely to be equally productive. • Reason: Find out workers productivity. If low, then fire and cut your losses. If high, then keep worker.

31. Example • Can hire A or B, paying each 100K/ yr for 40 yrs. • Worker A brings in 105K for certain • Worker B brings in 200K with prob 0.5 and -100K with prob 0.5 • Which do you hire if a) after 1 year workers have job guaranteed b) can fire worker at any time

32. If firm offers $20/hr then only workers with <=$20/hr productivity are apt to apply This is called Adverse Selection Adverse Selection Distribution of Productivities Density W

33. Solutions • Pay to screen workers • Often impractical • Offer probation wages • Require credential

34. Probation wage • If you cannot observe a worker’s true productivity, then: • Use low initial wage to keep low-productivity workers away. • Offer big raise to those who are not fired after first period (to attract productive workers)

35. Graphical Representation Post Probation WS Probation Period 1 Period 2

36. Problem, low skill vs. high skill • If low skill can apply and if probability of detection falls, how should wages be adjusted to screen out low skill?

37. Graphical Representation Post Probation WS Probation Period 1 Period 2

38. Education credential as signal • Mechanism: • Find an observable trait tied to productivity, e.g. education • Credential (or ‘signal’) should be harder for low-productivity workers to acquire • If wage gap between those with and without the credential is small, only most able will find it worth the effort to obtain.

39. Signaling • Assumptions for Signaling Theory • 2 ability types, high and low. • High>Low • Asymmetric information • Firms don’t know ability type • Workers do • More able workers have lower costs of schooling • Lower effort costs, enjoy school more, find it easier

40. Signaling $ C low C High High Low Schooling

41. Signaling • Schooling does not increase productivity • Only gives evidence of pre-existing ability

42. Is Schooling Only a Signal? • Counterarguments: • Vocational aspects of education increase productivity • Surgeon • Engineer

43. When is education more likely to raise productivity? • When specific skills taught map closely and very directly to skills used on the job • Engineering • Law • Medicine • MBA

44. Distributional Issues • Workers with above average abilities like screening • Less productive workers don’t like screening. • If workers uncertain of ability, then might like screening.

45. Assignment Email cynthia.benelli@ucsb.edu before the next class. Include links for sites you use. To be announced