This article, linked by Professor Bainbridge, argues that companies should provide "[p]ayment in-kind (perks), deferred compensation (corporate loans)," and encourage "conspicuous consumption" among top employees in order to ensure that they remain loyal to the firm. If the abstract to the article accurately reflects its argument, however, the authors have lept off the crazy branch of the utilitarian tree:
We argue that firms undertake to reduce employee savings in order to avoid final period problems that occur when employees accumulate enough wealth to retire and leave the industry. Normally, reputation constrains employee behavior, since an employee who "cheats" at one firm will then find herself unable to get a job at another. However, employees who have saved such that they no longer care about continued employment will act opportunistically in the final periods of employment, which can destroy much or all of the surplus otherwise created by the employment relationship. ….
There are so many bizarre or controversial assumptions in this paragraph that it could launch a dozen studies. Employees about to retire have little (or no) interest in their "reputation"? They have no legacy concerns? There’s no integrity effect? There are no benefits from a good reputation other than its signalling effect to future employers? And what of the assumption that retiring employees will have no future "employer" — there’s no chance of our retiring CEO wanting to be named to the Board of Directors of another company in the future?
Moreover, how the heck will the authors support the claim that "employees who have saved such that they no longer care about continued employment will act opportunistically in the final periods of employment" (emphasis added)? I mean, to a greater extent than employees act opportunistically throughout their employment? And how opportunistic does a CEO have to be (and how asleep must a Board be) such that, if such an increase in opportunistic behavior occurs, it "destroy[s] much or all of the surplus otherwise created by the employment relationship"? (What if the employment relationship lasted for several decades?)
There are other things to say about this and the other (unquoted) sections of the abstract, but this is enough. Contrary to Professor Bainbridge, then, I’m none too impressed so far. Being contrarian is not the same as being correct.
awwww! You corrected my favorite typo, von! No matter: I’m going to start using “how the hack?” at every available opportunity.
“Being contrarian is not the same as being correct.”
I disagree.
How the hack did you come to that conclusion, praktike?
As I understand it, this is common in the auto sales business. Salesmen at all levels are encouraged to spend every cent they earn, as conspicuously possible.
Keeps them poor, hungry, and aggressive.
Yep — at a time when private savings are at alarmingly low levels, especially given the distinct possibility of a serious downturn prompted by a rise in interest rates plus an asset-driven economy that’s in bubble territory, urging people to reduce their savings still further is just the ticket.
Did someone say contrarian?
This paper argues that, contrary to conventional wisdom, conflicts of interest among equities research analysts (i.e., where investment banks would offer positive analyst research in quid pro quos for underwriting business) were beneficial to the capital markets.
I guess there is something to be said for consistency.
“This paper argues that, contrary to conventional wisdom, conflicts of interest among equities research analysts (i.e., where investment banks would offer positive analyst research in quid pro quos for underwriting business) were beneficial to the capital markets.”
This statement makes me think that the paper is a parody.
“We argue that firms undertake to reduce employee savings …”
It’s funny to see this argument employed by corporations against their higher income workers for a change.
Didn’t Alan Greenspan years ago explain to all of us that the contemporary economy’s new emphasis on “productivity” and all of its marvelous facets keeps the workforce a little off-balance, a little insecure, a little scared, a little hunkered down lest anyone get too comfortable?
Like many of the folks who work at Wal Mart. Thank God they don’t have savings. I mean, thank God for me, that is, for where else would I buy cheap stuff? And thank God the grocery chains are trying to reduce the extensive savings of their employees .. hey, it’s my savings against theirs! And, thank the sweet Lord we’re reducing the savings of flight attendants because they are lucky just to have jobs, according to one well-coiffed traveller quoted in my local newspaper.
Perhaps we could pay everyone in “luck chits” rather than real money, if luck is the incentive the above-quoted customer makes it out to be. I suspect luck is the only reason a flight attendant hasn’t opened up the airliner door at 40,000 feet and tossed his parachute-less butt into the cold thin air, given his model of luck.
I’d like to see a post on the larger issue of the now prevalent and multi-faceted notion of “incentivizing” the workforce. Does Bainbridge consider the various hilarious results of incentivizing through options?
But maybe he’s right. Wouldn’t we rather have a hungry bunch of people servicing us rather than those with extensive savings who might be checking their stock quotes on my time? Preferably little people in ugly paper hats who manage to smile and scurry at my every whim despite their inability to pay for removal of that tumor gowing somewhere on their person.
And perhaps we could reduce Bainbridge’s savings by having him pay US every time we read his utilitarian claptrap? Why, he’d be lucky if I did read him.
It all sounds vaguely …. Marxist!?$$ … given the upside of a large pool of surplus labor without savings .. blah, blah, blah.
Incidentally, notyou’s example of car salespeople is duplicated across the retail scene.
Also, the Wall Street Journal editorial page has opined that regulating insider selling is a detriment to the capital markets. I thought that was parody, too, but Paul Gigot would never stoop to such tactics.
This sounds silly to me also, but I think it is part of a school of thinking that tries to justify all sorts of apparent nonsense as being based on rational economic thinking. For example, there is the argument that “golden parachutes” are necessary to encourage CEO’s to take risks, by assuring them that failure will not be personaly disastrous.
I’m not endorsing any of this, just pointing out that this paper is not wholly an isolated example. It’s no accident that the authors are at Chicago.
I read the paper. It made me feel dirty.
Incidentally, notyou’s example of car salespeople is duplicated across the retail scene.
I have yet to meet a sales manager in any industry who wouldn’t happily take a high performing salesperson to lunch and then past a BMW lot.
Freder,
Did the article offer any non-anecdotal empirical support for the argument? If not, did it suggest any way the theory might be tested? My guess is no.