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Promotions and Training: Do Competitive Firms Set the Bar too High?

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Abstract

Firms use promotions to match workers with jobs that fit their ability, but also to provide incentives to exert on-the-job training effort. As promotions make workers more attractive in the labor market, firms will balance productivity and retention costs. I show that if workers exert firm-specific training effort, profit-maximizing firms that cannot commit to promotion rules promote fewer workers than efficient. Differently, if firms can commit to promotion bars, for instance by means of structured managerial practices, they set the bar efficiently. If workers acquire portable training, this directly increases retention costs. Firms that cannot commit to promotion bars will set them inefficiently high. In this case, workers are discouraged from training when competition for talent is fierce. If firms can commit to promotion bars, they set them lower than without commitment providing strong incentives for workers to acquire portable training. However, in this scenario the promotion bar may be set too low compared with the efficient talent allocation.

Suggested Citation

  • Luca Picariello, 2019. "Promotions and Training: Do Competitive Firms Set the Bar too High?," CSEF Working Papers 552, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  • Handle: RePEc:sef:csefwp:552
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    Keywords

    Promotions; on-the-job training; poaching; career concerns.;

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • M53 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Training

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