Are Employee Selection and Incentive Contracts Complements or Substitutes?

M. Abernethy, H.C. Dekker, A. Schulz

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

There is a debate in the literature as to whether employee selection is a substitute or complement to incentive contracting. We argue that incentive contracts and selection can be both complements and substitutes conditional on the contracting difficulty faced by the firm. We examine these control choices in a setting where contracting difficulties arise due to the firm's choice of strategy and from the volatility created by the firm's external environment. We select a firm's commitment to organizational learning (OL) as our strategic choice variable as this provides a useful proxy for identifying settings where explicit incentive contracting is difficult. The results show that, as firms become increasingly committed to OL, incentive contracts and employee selection operate as complements. However, with a high commitment to OL and an increasing level of external volatility, contracting on performance measures will become less effective. In this context, our results indicate that there is a substitution effect toward employee selection.
Original languageEnglish
Pages (from-to)633-668
JournalJournal of Accounting Research
Volume53
Issue number4
DOIs
Publication statusPublished - 2015

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Contracting
Employee selection
Substitute
Incentive contracts
Organizational learning
Incentives
Performance measures
Substitution effect
External environment
Strategic choice

Cite this

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title = "Are Employee Selection and Incentive Contracts Complements or Substitutes?",
abstract = "There is a debate in the literature as to whether employee selection is a substitute or complement to incentive contracting. We argue that incentive contracts and selection can be both complements and substitutes conditional on the contracting difficulty faced by the firm. We examine these control choices in a setting where contracting difficulties arise due to the firm's choice of strategy and from the volatility created by the firm's external environment. We select a firm's commitment to organizational learning (OL) as our strategic choice variable as this provides a useful proxy for identifying settings where explicit incentive contracting is difficult. The results show that, as firms become increasingly committed to OL, incentive contracts and employee selection operate as complements. However, with a high commitment to OL and an increasing level of external volatility, contracting on performance measures will become less effective. In this context, our results indicate that there is a substitution effect toward employee selection.",
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Are Employee Selection and Incentive Contracts Complements or Substitutes? / Abernethy, M.; Dekker, H.C.; Schulz, A.

In: Journal of Accounting Research, Vol. 53, No. 4, 2015, p. 633-668.

Research output: Contribution to JournalArticleAcademicpeer-review

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