Incentives for Attracting Talent

Abstract

Which firms should offer higher-power incentives to its workers? Prior work suggests that all firms, but especially high-resource firms, benefit from using higher-power incentives because they attract more capable workers. This paper introduces a mechanism that, instead, leads firms with more resources to offer lower-power incentives. In our formal theory, as in prior work, higher-power incentives attract more capable workers and increase productivity, especially for high-resource firms. However, our mechanism shows that sacrificing value creation—by offering lower-power incentives—can increase the value captured by firms with more resources. Analysis of novel employer–employee data in real estate brokerage offers support for our mechanism. We show firms with more productive resources offer lower-power incentives and employ less able workers—despite the productive value of more capable workers.

Keywords: Strategic Human Capital, Organizational Design, Incentive Contracts, Assortative Matching, Matched Employer– Employee Data