Are Employee Selection and Incentive Contracts Complements or Substitutes?

Posted: 4 Aug 2015

See all articles by Margaret A. Abernethy

Margaret A. Abernethy

University of Melbourne, Department of Accounting

Henri C. Dekker

VU University Amsterdam - Department of Accounting

A Schultz

Independent

Multiple version iconThere are 2 versions of this paper

Date Written: August 3, 2015

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.

Keywords: employee selection; incentive contracting; strategy; organizational learning; volatility

JEL Classification: D22; D23; D83; M41

Suggested Citation

Abernethy, Margaret A. and Dekker, Henri C. and Schultz, A, Are Employee Selection and Incentive Contracts Complements or Substitutes? (August 3, 2015). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2639062

Margaret A. Abernethy (Contact Author)

University of Melbourne, Department of Accounting ( email )

Victoria
Melbourne, Victoria 3010 3010
Australia
+61 3 8344 7655 (Phone)
+61 3 9349 2397 (Fax)

Henri C. Dekker

VU University Amsterdam - Department of Accounting ( email )

Netherlands

A Schultz

Independent ( email )

No Address Available
United States

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