THE GOVERNANCE OF HUMAN CAPITAL: LESSONS FROM
EMERGING INDUSTRIES
(‘Organizzazione e governance del capitale umano: lezioni dalla nuova
economia’)
Anna Grandori
Alessandro Usai
Luca Solari
Silvia Bagdadli
CRORA
Istituto di Economia Aziendale
Università Bocconi
viale Isonzo 23
20135 Milano
Italy
Ph.+39.02.5836 2633/2637
Fax +39.02.5836 2634
e-mail: [email protected]
This paper is concerned with the governance of human capital as distinct from the
governance of the employment relation. Most traditions of analysis in the area of the
organization of work – in economics and sociology alike – have been concerned with
how the provision of work can be coordinated with the provision of the services
rendered by other types of resources – technical, financial, physical. However, while for
technical and financial resources, the difference between
a relation of resource
investment and a relation of service provision is usually clear, the distinction has been
quite blurred as far as human relations are concerned.
1
In general three units of analysis can and should be distinguished : the level of services
rendered by the use of resources, the level of the ‘bundles of resources’ from which they
stem, the level of actors - physical or juridical persons – possessing the resources
and/or delivering the service (Penrose 1959, Grandori 2001). They should not be
collapsed into one another, in principle, as different combinations between actors,
resource ownership and acting (service delivering) can be envisaged.
Management literature talks indifferently of ‘human resource management’ and of
‘labor relations’, and seldom distinguishes between the level of ‘human resources’
(knowledge and competence ) and the level of the actors possessing them. ‘Human
resources’ are often considered as a synonym of ‘people’, thereby neglecting the issue
of people’s strategies about the allocation and use of their resources.
Sociological analyses have been overly concerned with labor as a service (strange to
say, given that Marx – often quoted in that literature – was one of the first to notice that
there is a difference between selling labor and selling ‘labor-power’; or perhaps
understandably because that tradition of thought also takes for granted that ‘capital’ and
the ‘means of production’ are separated from work).
Organizational economic analysis is concerned with ownership of assets, and does
distinguish between labor transactions involving or not involving investments in
specific assets (Williamson 1979). However, both TCE and agency theory remain
focused on the governance of ‘transactions’ – exchange of labor services across
technologically separable interfaces – and do not examine fully the governance of
human capital investments in technologically unseparable combinations among
themselves and/or with other assets. In addition, their analyses are conducted under
2
quite restrictive assumptions on the configurations that human capital providers’
preferences may assume - randomly distributed in Williamson’s analysis (1981); riskaverse and effort averse in agency theory (Levinthal 1988) .
Overall, the governance of labor relations when the relation is an exchange of services
is therefore well analyzed. It gave rise to typologies of ‘contracts’ effective for the
purpose: ‘market-like’, ‘hierarchical’, ‘obligational’ and ‘relational’ (Williamson 1979,
1981) (Figure 1). They differ by time horizon and by the mix of governance
mechanisms employed: respectively, the matters regulated by the contract, include only
prices and service specification, or also and mainly supervision, rules and procedures,
norms of reciprocity and fair conduct. These governance arrangements can be fairly
well predicted by features of the labor transaction, such as task interdependence and the
observability of performances, even without hypothesizing any specific investment of
human assets.1
Interdependence
-
+
+
market-like contracts
obligational
-
hierarchical contracts
relational
contracts
Difficulty in performance
evaluation
contracts
Figure 1. The governance of labor transactions: a typology of exchange contracts
Source: Adapted from Williamson (1981)
A further array of contracts, however could be prospected for labor relations
3
characterized by specific human capital investments rather than just by service transfers
– which are analysed in less detail. In this case the situation would be similar to that of
an investor of specific technical capital. The relevant questions for an investor are:
(Shleifer, Vishny 1996): what governance arrangements can induce to invest? What the
guarantee are that the investment will be fully compensated? What the prospects are to
be able to collect the capital back, how much accrued, at what time? The relevant
governance mechanisms for solving those problems typically include ‘property rights’
and not only the organizational rights mainly considered in labor exchange contracts
(rights of action, information, communication, decision and control). Property rights, in
the broad sense currently admitted also in organizational economics, include the
ownership of assets, the rights to residual rewards from their use, residual decision and
control rights on how the assets are used, the right to sell the asset or the services
deriving from it ( Fama , Jensen 1983a,1983b). Contracts including a specification of
how those rights are allocated can be defined ‘associational’ contracts, as distinguished
from ‘exchange’ contracts, as the formers establish a continued association among
dedicated assets, expose them solidarly to risk, and entitle the providers of those assets
to sharing the residual economic results of the activity (Galgano I.II.III 1974)2.
A typology of associational contracts. A first general hypothesis, therefore, is that
human capital investments are to be regulated by associational contracts (Becker 2000,
Hart and Moore 1986, Aghion and Tirole 1994).
More refined hypotheses should however be advanced in order to describe and explain
the variety of associational contracts actually employed3. They involve differences in
the extent to which different property rights are shared by human capital providers. The
4
following governance mechanisms can be usefully distinguished to capture those
differences:
-
ownership of firm assets, in the form of own capital or shareholding;
-
rights on residual rewards, in the form of pay for performance or of stock options;
-
non residual, risk-free rent sharing provisions, in the form of above average base
income;
-
decision and control rights on how the ‘professionally conducted organized
economic activity for the production or exchange of goods or services’ constituting
the firm should in fact be conducted;
-
residual decision and control rights on rewards allocation and on human capital
mobility;
-
‘beautiful exit’ rights (golden parachutes, time horizon of stock option rights).
Supposing that specific investment of human assets are made, we should hypothesize
that a non contingent feature of the governance package is that relevant decision and
control rights on activities are allocated to those principals/agents. They would care a lot
about what particular activities the firm will undertake, as their own capital will go
together. They would not be 'quasi-indifferent' on the nature of tasks, as it was
hypothesized to occur in a classic ‘employment relations’ (Simon 1955), as one reason
to make a human specific investment (and actually to explain why such risky
undiversified investments are made at all) may well be the interest in performing
particular tasks. The effective combinations of those mechanisms are predictable on the
basis of some additional variables, that qualify the types of specific human capital
investments made. Relevant candidate variables are the measurability of performance
5
and the riskyness of activities.
Current conceptualizations about corporate governance structures, and the relations
between financial capital providers and human capital providers have focused on the
motivational problem of providing ‘powerful incentives’ to those in charge of ‘control’,
in order to orient the latter’s (unobservable) behaviors in the interests of the former
actors. This frame neglect the risk problem as well as the problem that the latter actors
make specific investments in the firm as well; to the extent they do so, they are in a
position of ‘principals’ as well.
The riskier an activity is, the more results are influenced by exogenous variance, the less
intense the optimal incentive is, ceteris paribus (Milgrom, Roberts 1992). Hence we
should hypothesize that the incidence of pay for performance, should not be extremely
high in the governance of human capital investments in risky activities.
Unmeasurability of outcomes is also an impediment to pay for performance. We refer
in particular to unmeasurability due to the intrinsic complexity of activities (uncertain
categories of consequences, long term effects, poor quantifyability) rather than just to
team production effects, which could be managed by group contingent rewards. By
contrast, individual and group pay for performance should be diffused wherever
activities stay in known causal relations with measurable outcomes.
What mechanisms can substitute for high powered incentives at the individual and
group level, in conditions of low measurability of partial outcomes? There, shared
property rights over firm assets and activities, globally intended, are in order (Fama,
Jensen 1983a, 1983b). Figure 3 hypothesizes that ownership will not be separated from
control in condition of limited risk and highly complex, non measurable outcomes;
while financial investments will be more separated from human capital investments in
6
highly risky ventures, where otherwise, human capital providers, which can not
diversify easily their human investments, would bear excessive risk. Then, the
governance of human capital investment relations in highly risky activities, should be
characterized by more diversified investors (internal and external), a higher incidence of
‘premium’ base income and of ‘golden parachutes’, a higher incidence of stock options
(a relative low risk and collective form of contingent reward) or analogous ‘bonuses’
linked to positive variance in firm’s results in non listed firms.
A typology of human capital ‘markets’. A second array of hypotheses on the governance
of human capital investment relations, concerns the modes and channels through which
these managerial resources are attracted, evaluated and selected, in emerging industries.
Level of Risk
and
innovativeness
Difficulty
in
evaluating
performance
Ind/group
Pay
for
performance,
gain/profit
sharing
+
Diversified
investors,
bonuses/stock
options,
premium
income
base
Managerial
shareholding/ow
nership,
professional
partnerships,
Mgt Buy Outs
Figure 2. The governance of specific human capital investments: A typology of
associational contracts
+
How is managerial Human Capital "traded" in the labor market? What are the
7
mechanisms governing the exchange of managerial Human Capital across
organizational boundaries, in emerging industries?
In the last decades it appeared clear how the internal and external labor market partition
was unable to explain important phenomena. As it happened with regard to other
important economic phenomena, the internal/external labor markets divide seems to be
insufficient to explain Human Capital mobility. Granovetter (1974, p. 26) already noted
how "several factors mitigate against perfect labor markets. Inertia as well as social and
institutional pressures ... (but) the factor most relevant to the present discussion is
imperfect information". Years later, Roth and Xing added that "markets may require a
good deal of organization. This runs counter to the view implicit in much of the
economic literature, which is that markets are largely self-organizing" (1994: 2). It is
difficult for managers to possess complete information about job opportunities, job
characteristics, job attractiveness and on the other hand it is often difficult for
companies to get access and subsequently assess the real value of the managerial
Human Capital in the labor market. According to the economic view candidates and
employers try to overcome the limitation of information adopting active "search"
behaviors, maximization of utility by rational actors using marginal principles pervades
these models. Perhaps however the way job-search theory has most adversely affected
research has been in deflecting attention from the large number of jobs that, by almost
any definition, are not found by search4 (Granovetter, 1995: 142). In the last decades
however, starting from the founding work of Granovetter (1974), scholars, mainly
coming from sociology, have started to study the social side of labor markets and
transactions, looking at the hidden governance structures laying beyond the "market"
idealtype. Granovetter (1974) found that 55,7% of workers interviewed found their job
8
through personal contacts, others (Corcoran, Datcher and Duncan, 1980:12), following
5.000 American families through a panel design, found that 52% of white men and
47,1% of white women found their jobs through friends and relatives. These evidences
have been confirmed in the following years by studies on workers of manufacturing
plants (51,4% of jobs found through personal contacts; Marsden and Campbell, 1990:
68) and on young American people employment (at least 40% of 17-25 year-old
workers found jobs through personal contacts; Staiger, 1990: 7). The "social
governance" of job markets has been confirmed outside the US. In Britain during the
1970's and 1980's between 30 and 40% of respondents to a national survey found jobs
through friends and relatives (Fevre, 1989). Watanabe's (1987) study of 2003 male
workers in the Tokyo metropolitan area, shows that of those who change jobs, 54,6%
do so through personal contacts. Boxman, DeGraaf and Flap (1991), in their survey of
1.359 Dutch top managers, found that 61% had found their job through contacts. Finally
in a recent survey conducted among alumni of an important Italian University of
Business studies, it emerged that "only" 23,3% of the respondents declared to have
found their current job through personal contacts5 (Santoro, 2000), however, the
percentage was higher for respondents in the highest age and income categories.
In short, it seems that not only Social Capital may be crucial in the creation of Human
Capital (Coleman, 1988) but that it could be even more important as a governance
mechanism in the transfer and exchange of it.
One limitation of large part of the mentioned research has been a lack of interest in
discriminating between effective and efficient forms of social networks and ‘clanistic’
and ‘oversocialized’ ones. To the purposes of understanding how human capital
9
investments are regulated in emerging and innovative industries, for example, it would
be crucial to distinguish between effective forms of professional network – responding
to the difficulties in assessing human resource potential – and ‘socially over-embedded’
networks generating ‘local search biases’, thereby reducing innovation potential.
Building on research focusing on high level work and innovative industries, as well as
on relevant theory, we are therefore going to construct a typology of effective forms of
network governance that takes into account some relevant contingencies, which
parallels what has been done for contractual forms.
For what it concerns managerial networks, it has been showed that managers have larger
networks than non-managers, that managers' social networks (core discussion networks)
tend to include a greater number of professional contacts, and that managers interacting
with co-workers tend to have higher job rewards (Carroll and Teo, 1996). It has also
been argued that managers with well established networks have better career potential
(Jackall, 1988; Krackhardt, 1990). Finally it seems that managers, because of the long
hours they spend under stress at the workplace, tend to achieve higher intimacy with coworkers, transforming apparently professional ties into especially "close relationships"
(Carroll and Teo, 1996). Most of the research however has been conducted within
organizational boundaries and not so much is known about the role and the
characteristics played by managers' social networks when managers change jobs.
Similarly, with regard to emerging industries, not so much is known about the
characteristics of job markets and about the governance of Human Capital transactions.
Windolf (1986), based on a study of English and German firms, relates recruitment
10
strategies of firms to their particular industry niches, saying that most likely to recruit
through networks are firms that are mainly trying to maintain the status-quo, while
"innovative" firms that want to attract as many innovators as possible will try to go
beyond networks in order to get in touch with a wider group of candidates. However,
the author found little empirical evidence for his propositions.
While Human Capital market in emerging industries has received little attention, the
governance solution for the transfer of other kind of resources, mainly financial, have
been studied more carefully. Recently Shane and Cable (2000) showed how financing
processes of new ventures are significantly governed through social networks. The
existence of direct and indirect social ties between investors and new entrepreneurs
increase the likelihood that a new venture will receive the funding required. This
evidence would be explained by the capacity of social ties to give access to private
information about the quality of other people's talents and their tendency to behave in an
opportunistic manner (Shane and Cable, 2000; Aldrich and Zimmer, 1986; Gulati and
Gargiulo, 2000; Uzzi, 1996). In other terms, direct and indirect social ties would limit
the information asymmetry, existing between the investor and the entrepreneur, deriving
from the absence of certain and objective criteria in evaluating new ventures.
So which governance mechanism should we expect to regulate Human Capital
investments in innovative activities? Governance mechanisms should respond to two
(often contrasting) forces.
1. Networks can be used to overcome information asymmetries (Burt, 1992; Fernandez
and Weinberg, 1997), therefore we expect that a more intensive use of
personal
contacts when the conditions are more innovative will occur and will be efficient.
11
2. The adoption of market brokers who look outside of the existing managers' social
networks, scanning the market and providing more diverse and innovative Human
Capital should be a precious complementary mechanisms for sustaining innovativeness
and reduce opportunity costs. The following table illustrates a typology of governance
mechanisms for the exchange of Human Capital according to two dimensions: the
innovativeness of the activity and the level of competence required in the candidate.
The innovativeness of the activity pushes the organization away from adopting the
market for two reasons. If the activity is new it is likely that a specific Human Capital
market is not yet formed and institutionalized. Secondly, if the activity is new and
inherently more risky, the choice of the candidate will be heavily driven by delicate
judgments of confidence in competence and reliability. For those reasons, we expect
that personal networks play a prominent role in governing the acquisition of Human
Capital for innovative activities, while for more traditional activities the use of market
and quasi-market solutions will be higher. But we can distinguish further between types
of networks as the level of difficulty in evaluating human capital investments ex-ante
varies; even if a firm is a start up in a very new activity, some competence profiles may
be used also in other setting and not intrinsically complex to evaluate, for example
because they belong to clearly institutionalized and certified specializations. In sum,
let’s identify at least that the four types of govenance arrangements reported in Figure 3,
and to hypothesize that they are superior in governing the access of human capital
assets into new ventures in the indicated circumstances.
12
Innovativeness of
activities
Complexity
human assets
-
+
-
Open
institutionalized
markets
Quasi-internal
Professional
Networks
+
Brokered markets
Quasi-External
Professional
networks
of
Figure 3. A typology of human capital mobility governance forms
-Open market is good for exchanging Human Capital characterized by well-defined,
non-differentiated, hence often specialized and non firm-specific, competences. As said,
we do not expect that ‘open’ markets of human capital are close to ‘perfect’ markets.
They are likely to be highly institutionalized markets, relying on quality certifications
released by the institutions which contributed to generate or evaluate that capital
(educational institutions, professional associations) (Karpik 1989).
-When the competences sought for are not complex to evaluate but the activity is new
and risky, a more effective mechanism will be cooptation based on past experience of
common work , through professional relations which has become dense social
relationships ( former co-workers and business partners) and thus provide rich partnerspecific knowledge.
- When the complexity of competences is high but the activity is not highly innovative
, we could expect a higher use of human capital market brokered by professional
services (e.g. head hunter firms). The brokerage of professional services specialized in
scanning the market and putting demand and offer in contact should be particularly
useful for those relatively rare and sophisticated competences, and professional services
13
also have superior capacities to assess them.
-Finally, when both innovativeness of activities and competences complexity are high,
we would expect quasi-external professional networks to be a superior governance
mechanism. Those networks should consist of ‘weaker ties’ (Granovetter 1995) with
respect to quasi-internal social network, and should be richer of ‘structural holes’ (Burt
1992) and indirect ties in order to sustain both efficiency of serch and the variety of
alternatives.
Empirical evidence from Italian New Market firms.
The analysis of data collected in a recent empirical study we conducted in Italy provides
the ground for a preliminary test of our hypotheses on governance mechanisms of the
Human Capital investments.
Within the scope of a broader study, we were able to collect data on 164 top managers
in 92 companies listed ( or who submitted request for listing by November 2000) on the
Italian New Market. This sampling criterion selects firms that are relatively successful
and solid, which went through various rounds of financing and through an IPO. We had
a return rate of 63% (58 companies). In each companies we had responses from the
CEO and the first level managers, within a maximum of 5 managers for each
companies. 164 is the total number of managers who participated into the research.
Among the 164 managers who responded to our survey, 149 had previous work
experiences and we collected data on their complete professional records. Data collected
allow us to identify industry, functional area, organizational rank, length of stay, referral
system which lead them to New Market positions, and several other biographical and
professional information on current jobs and on changes with respect to previous
14
positions in non-New Market firms.
1. Access structures
To explore how the potential investors of human capital encounter opportunities to
invest, and how these matches are evaluated, selected and retained, we enquired into the
how the Italian New Economy managers got in contact with their new work and
investment opportunities. While expecting networks to play a prominent role, we also
wished to discriminate among professional networks – based on past tests of the validity
and reliability of the counterpart’s competence – and social networks of a clanistic and
oversocialized variety.
The term ‘social networks’ is here limited to designate ties are based on kinship,
common studies, friendship deriving from social activities and friendship deriving from
common geographical location (i.e. neighbors). We hypothesized that in innovative
activities the ‘weakness of strong ties’of the latter type (Grabher 1983) should have
been sensible, and should result in little influence of those networks in the access to the
successful new companies considered. In other terms, the type of trust sustaining
effective access network in innovative activities is supposed to based on competence
reliability and validity assessments, rather than on interpersonal loyalty and excessively
long-lasting ties. In addition, due to the novelty of context, functional and industry
experience, here used as control variables
6
may represent a weak certification
mechanism in a context where new competencies are needed not necessarily codified,
and specific industry knowledge is still to be created. For all these reasons, we predict
that pure friendship and kinship relations, which have previously shown to be relevant
especially for non-managerial careers within traditional industries (Corcoran, Datcher
and Duncan, 1980; Marsden and Campbell, 1990), won’t show relevant impact on
15
managers’ access to the more solid firms of the New Economy.
Professional networks are in turn differentiated into quasi-internal networks (ex-coworkers who move as a group into a new activity), quasi-external ( ex-business partners
– e.g.clients, suppliers, consultants - not belonging to the same internal labor market
beforehand),
brokered networks (mediated by personnel search firms, venture
capitalists or other broker) and quasi-markets (open calls/offers, direct or through
institutions but not ‘ad personam’).
Our results generally support these hypotheses. In the question proposing a list of 8
possible channels of access, 56.9% of our subjects tickled the single channel represented
by all types of networks, while 7.8% used brokers , and 21.6% exchanged
offers/proposals directly.
For understanding the differences among the types of network used, we first applied an
event-history analysis (see Appendix 1 for details). Using this technique, we are able to
ascertain the impact that the use of different types of networks on the hazard rate that an
event of job holding terminates in an entry in a firm listed in the New Market.
The variables considered in the present empirical analysis are described in Table 1.
Table 1. Variables in the event-history model of access
Variable
Functional specialism
Industry specialism
Access through networks
Professional network
Social network
Description
Dummy variable, coded 1 for respondents who had 75% or more job experiences
within the same functional area and 0 otherwise
Dummy variable, coded 1 for respondents who had 75% or more job experiences
within the same industry and 0 otherwise
Dummy variable, coded 1 for respondents which used networks and 0 otherwise
Dummy variable, coded 1 for respondents who used professional networks and 0
otherwise
Dummy variable, coded 1 for respondents who used social networks and 0
otherwise
16
Table 2. Event-history model of access (Weibull specification)
Functional specialism
Model 1
Model 2
Model 3
Model 4
- 0.0023**
-0.0016**
-0.0016**
-0.0009
(0.0009)
(0.0007)
(0.0007)
(0.0.3094)
2.5077***
2.4036***
1.6264***
(0.3632)
(0.3664)
(0.3094)
Industry specialism
Access through networks
-0.0012
(0.0009)
Professional network
0.8188***
(0.1365)
Social network
-0.8206***
(0.1365)
Sigma
2.9925***
2.5354***
2.5122***
2.0509***
(0.1488)
(0.1324)
(0.1309)
(0.0994)
Log likelihood
-717.3831
-691.7143
-690.3920
-658.3380
D.F.
148
147
146
145
Number of spells
455
455
455
455
Table 2 presents the results of our analyses which give support to our hypotheses
on the adoption of network as governance mechanisms in the case of innovativeness of
activities and competences complexity. While Model 1 and 2 control for background
factors (industry and functional background), model 3 and 4 consider networks as
referral systems. The distinction between professional and social networks allow us to
see that strictly “social” networks (i.e. networks of friendship or family ties) are even
negatively linked to mobility into New Market positions; whereas the use of
professional networks (i.e. networks of colleagues, managers, business partners, etc.) is
strongly and positively linked to the ‘termination’ of the career events into a New
Market positions.
Consistent with our theoretical argumentation, instead, professional networks emerge as
the prominent governance mechanism regulating and sustaining the access of human
capital investors into New Market firms in Italy (Tabel 3).
17
Table 3 - Access channel to the NE
Valid
Missing
Total
Network
Direct contact
Agencies & headhunters
New business
Other
Schools and university
placement
Announcements
Internet
Total
System
Frequency
87
33
12
9
7
2
Percent
53.0
20.1
7.3
5.5
4.3
1.2
Valid Percent
56.9
21.6
7.8
5.9
4.6
1.3
Cumulative Percent
56.9
78.4
86.3
92.2
96.7
98.0
2
1
153
11
164
1.2
.6
93.3
6.7
100.0
1.3
.7
100.0
99.3
100.0
To better explore the nature and relevance of professional networks, we distinguished
among ‘quasi-internal’ and ‘quasi-external’ networks and related them to a
classification of our sample into ‘figures’ which are good proxies of the complexity and
difficulty of evaluation of human asset investments:
-the ‘founders’ and the ‘investors’ are the top managers who invested own capital in the
firm; the former are present since the start-up phase, while the latter joined later, ad are
the groups with the lower index of specialism;
-the ‘first-vawe’and ‘second wave’ managers are the top managers who have not
invested own capital in the firm; the former are present since the start-up phase and are
the groups with the highest index of specialism;
-the ‘non-dirigenti’are managers who, in spite of reporting directly to the CEO, do not
have a contract of ‘dirigente’ (the most important juridical distinction between labor
contracts in Italy is between the ‘inquadramento unico’ of white and blue collar workers
in 8 levels of qualification; and the ‘dirigenti’) and are the yougest group.
18
Table 4 - Managerial types and access through network
Total
non network
15
42.9%
6
Investors
28.6%
7
First wave managers
38.9%
13
Second wave managers
33.3%
19
Managers non-dirigenti
65.5%
3
altri
33.3%
63
41.7%
Founders
network
20
57.1%
15
71.4%
11
61.1%
26
66.7%
10
34.5%
6
66.7%
88
58.3%
35
100.0%
21
100.0%
18
100.0%
39
100.0%
29
100.0%
9
100.0%
151
100.0%
As shown in Table 4, the network channel is more strongly used by the Investors,
slowly decrease for First and Second wave managers, and is much more rarely used by
the non-dirigenti. This distribution is what was expected on the basis of our hypotheses:
the rate of use of network is directly and positively related to the complexity and level
of human capital investments.
But what kind of network are used by the different groups? In order to answer to this
question we investigated the kind of relations used as network contacts. Both the
relation existing between the candidate and the network contact and the relationship
existing between the company hiring and the network contact have been tracked. The
following table illustrates the "access governance forms" used by the different kind of
managers. The access governance forms have been defined and aggregated as follows.
"Open market access" consists in any access through direct contact (CV sending and
alike), Internet applications, response to journal announcements. "Brokered market" is
any access mediated through professional brokers (Headhunters, labor agencies,
19
University placement). "Quasi-internal professional network" is defined by accesses
through ex-colleagues (ex-boss; ex-employee; ex-peer). It is called quasi-internal
because the network used to have access to the new jobs consists of ex-internal labor
markets. "Quasi-external professional networks" are defined as accesses obtained
through previous business contacts. They are called quasi-external because, with regard
to the candidate, those contacts were external to the company the candidate worked for.
Finally, we have the access through "pure social networks" which coincide with the
more traditional definition of social relationships, accesses through friends, relatives,
neighbors, ex-school-mates. "Other" are the accesses through contacts not matching any
of the previous categories.
Table 5 - Managerial types and access governance forms (including the "access
network" typology based on the relationship between the manager and the network
contact)
Open
market
Founders
Investors
First wave managers
Second
wave
managers
Managers
"nondirigenti"
Others
N.
0.24
0.11
0.29
0.18
0.48
Brokere Quasi internal Quasi external
Pure
Other
d market professional
professional
social
contact
network
network
networks
0.00
0.28
0.31
0.10
0.07
0.06
0.33
0.17
0.33
0.00
0.06
0.41
0.24
0.00
0.00
0.13
0.20
0.20
0.25
0.05
0.15
0.15
0.04
0.11
0.07
0.11
0.22
0.11
0.22
0.22
35
13
34
27
24
0.25
0.09
0.24
0.19
0.17
Note: The table entries are percentages of access, calculated for each managerial type.
0.11
7
0.05
This analysis shows again how the "non-dirigenti" are the only group for which Open
market constitute a relatively highly used access channel, coherently with the lower
complexity and uncertainty of their roles into the companies. For the other managerial
types, networks are the dominant form. In the very first phases of hiring, when the
20
difficulty of evaluating human capital investments is highest, quasi-internal networks
play a very significant role (see the percentages of first wave managers contacted
through ex-colleagues). This evidence seems to constitute a true evolution of the well
known Internal labor market phenomenon. In other terms, Internal labor markets (ILM)
do not disappear when we consider career movements across organizational boundaries.
ILM are just not visible anymore unless we take into consideration network effects and
in particular we analyzed the nature and content of the network contacts. If we do so we
see that, especially in complex and emerging industries, ILM still work through
networks of ex-colleagues. The reputation, position, status, experience accumulated into
previous jobs is not wasted but it is used by networks as a selection criterion across
organizational boundaries as it would happen within the organization. Given the higher
job mobility characterizing all industries and emerging industries in particular the
importance of ILM through networks is likely to increase and would need further
investigations.
Quasi-external networks constitute a second important kind of network access. It seems
reasonable to hypothesize that quasi-external relationships are "weaker" but also richer
in structural holes and non-redundant information with respect to quasi-internal
networks. Founders seem to have used a lot this kind of access mechanism.
Table 6 - Managerial types and access governance forms (including the "access
network" typology based on the relationship between the network contact and the
company in which the manager will eventually get the job)
Open
market
0.27
Founders
0.12
Investors
First wave managers 0.31
Second
wave 0.18
Brokered Quasimarket
internal
network
0.00
0.35
0.06
0.35
0.06
0.13
0.13
0.46
Quasi-external
professional
network
0.27
0.29
0.25
0.15
Pure social Other
network
contact
0.08
0.06
0.13
0.08
0.04
0.12
0.13
0.00
21
managers
Managers
dirigenti"
Others
N.
"non- 0.48
0.15
0.22
0.11
0.00
0.04
0.11
35
0.26
0.22
13
0.10
0.67
45
0.34
0.17
26
0.19
0.00
8
0.06
0.17
7
0.05
This second analysis tells us that the company hiring relates heavily on internal
employees in order to select new candidates. The analysis illustrates how in almost all
managerial categories the manager's network contact was someone working for the new
market company in which the candidate will eventually get the job. Once again ILM
seems to play an important role in influencing careers across organizational boundaries.
In this second case however are the actual companies that exploited their internal
resources in order to have access to external managerial candidates. Not only old ILM
help managers in finding companies but also actual ILM help companies finding new
managers. In order to differentiate our inter-organizational ILM from the traditional
ones, we will call our type Internal Labor Networks (ILN), as opposed to business
contacts which may well represent "External labor networks".
The following table is apparently very similar to the previous one, however it
summarizes a different aspect of access networks. The first two categories are the same
as before (Open market and Brokered market), but we have different information
regarding the access network. While the first table shows which kind of relationship
existed between the candidate and the network contact (the person which signaled the
job opportunity to the manager), this second table illustrates which kind of relation
existed between the manager's network contact and the New Market company in which
the manager eventually got the job. In this second analysis tough, we have an access
through "Quasi-internal networks" when the manager's network contact was an
22
employee of the New Market company in which the manager eventually got the job. We
have a "Quasi-external professional network" when the manager's network contact had a
professional relationship (client, supplier, consultant, capital provider) with the New
Market company of destination. We have a "pure social network" access when the
manager's network contact had a social relationship (friendship, kinship, ...) with
someone inside the New Market company in which the manager eventually got the job.
2. CONTRACTUAL STRUCTURES
With regard to the types of associational contracts, we collected data on the structure of
the compensation system, the allocation of property rights and decision rights. In
particular we collected evidences regarding four characteristics of the incentive schemes
used to govern managerial human capital in the New Market: the diffusion of
managerial ownership, the diffusion of stock options, the amount of variable
compensation on the total compensation of managers, the increase of total
compensation obtained in the change between previous jobs and jobs in New Market
companies; and regarding six characteristics related to the allocation of decision rights:
the level and increase in the amount of economic and people responsibility, the
incidence of team work and of technical problem-solving in one’s area of expertise, the
degree of decision autonomy.
The next table gives some descriptive statistics of those variable:
23
Table 7 - Descriptive statistics
Total compensation between
NE and OE
Managerial ownership in NE
Proportion of non-variable
compensation in NE
Proportion of non-variable
compensation in OE
Stock options NE
Stock options OE
Valid N (listwise)
N
147
Minimum Maximum
1.00
6.00
Mean
2.9796
Std. Deviation
1.2133
163
155
.00
.00
1.00
100.00
.4110
77.8613
.4935
21.7759
139
.00
100.00
86.5755
20.4851
162
145
129
.00
.00
1.00
1.00
.5185
.1034
.5012
.3056
The change in total compensation between previous jobs and jobs in New Market firms
has been measured with a scale ranging from 1 (actual compensation lower than
previous) to 6 (actual compensation more than triple than previous compensation).
Managerial ownership has been measured with a dummy variable measuring if manager
had a direct financial stake into the company. Stock options has also been measured
asking the respondents if they participated into a stock options plan. Finally, the
proportion of fixed income on total compensation was expressed as a percentage, as
well as the incidence of various specified forms of ‘variable’ compensation (pay for
individual performance, pay for group performance, profit/gain sharing policies,
dividends).
Task-related variables were measured by asking their absolute present levels and the
amount of increase with respect to the last non-NE job on five point scales (largely
inferior, inferior, equal, superior, largely superior). Responsibility was measured as
level of economic indicators for which one was responsible and span of control;
teamwork and problem solving intensity in % of time devoted; autonomy was measured
only comparatively with respect to the last non-NE job, with five levels of increase or
24
decrease in the possibility to act independently.
A first interesting consideration comes from the simple cross-tab analysis of managerial
ownership and stock options. The following table illustrates how the two dimension of
human capital governance seem to be relatively independent, hence, rather fungible
mechanisms for governing human capital investments. Our managerial population is
sparse along the two dimensions which combined define 4 managerial sub-groups: those
who are "owners" of part of the company and who are also committed to be owners in
the future with the stock options plan (21,6% of respondents); at the opposite, we have
managers absent from the proprietary group and also not participating into any stock
option plan (28,4% of respondents); finally, we have owners not participating to stock
option plans (19,8%) and vice-versa managers with stock options without being
shareholders yet (30,2%, relative majority).
Table 8 - Managerial shareholding and stock-options: two independent dimensions of
associational contracts
Managerial shareholding
No
Yes
Total
Stock option
No
Count
46
% of Total 28.4%
Count
32
% of Total 19.8%
Count
78
% of Total 48.1%
Total
Yes
49
30.2%
35
21.6%
84
51.9%
95
58.6%
67
41.4%
162
100.0%
It is interesting to see how those subgroups are characterized in terms of other
dimensions of the governance of human capital. For instance how different is the
compensation structure of managers shareholders, stock option owners and other
25
managers? The following table illustrate the differences in the mean "fixed"
compensation between those managerial sub-group:
Table 9 - Total compensation between OE an NE
Managerial shareholding NE Stock option NE
Non shareholders
No
Yes
Total
Shareholders
No
Yes
Total
Total
No
Yes
Total
Mean
84.4783
80.2222
82.3736
75.2667
68.0735
71.4453
80.8421
74.9937
77.8613
N
46
45
91
30
34
64
76
79
155
Std. Deviation
15.4801
15.3444
15.4759
30.5196
24.0870
27.3085
22.9016
20.3697
21.7759
ANOVA Table
Sum of
Squares
4487.412
Total compensation Between Groups (Combined)
between
*
managerial
shareholding
Within Groups
68537.855
Total
73025.268
df
1
153
154
Mean
F
Square
4487.412 10.017
Sig.
.002
447.960
The level of present and future ownership seem to correlate with a higher proportion of
variable compensation. While we have dividends included in the calculation of the
variable part of compensation, however, this figure does not take into account Stock
Options gains. Managers with the highest variable income are managers who are both
shareholders and possessors of stock options (68% of fixed income), on the opposite we
find managers with no equity stake nor stock options, who have the most fixed
compensation package (84,5% of fixed income).
Other interesting evidences come from the comparison of compensation structures
26
between managers of Old and New economy. Table 9 shows how the respondents faced
a significant increase in the variable part of their compensation when moving to jobs
into New Market's companies. However, the prevailing forms of variable compensation,
are linked to the
ownership of firm’s financial assets (Stock options , dividends) rather than based on pay
for individual/group performance systems, as predicted.
In addition, if we enquire into the differences in reward structures for the different
managerial types, we can see that the mix of governance mechanisms vary according to
the level of task complexity and difficulty in evaluating their outcomes, as usually
expected. The incidence of pay for performance is positively related to the level of
discretion and responsibility of the role.
On the other side, the result also supports the hypothesis that in the risky activities
considered human capital investors demand a fairly high raises in the fixed component
of reward, that we anticipated as a form of insurance against risk.7
Table 10 - Proportion of fixed compensation
Proportion of fixed compensation in OE
Proportion of fixed compensation in NE
Mean
86.6
77.9
Std. Dev.
20.5
21.8
It is possible to see how also the proportion of managers having stock options increased
significantly in the transition to the New Market, where companies and activities are
generally characterized by higher uncertainty and performance still difficult to evaluate.
27
Table 11 - Stock option New Economy * Stock option Old Economy Crosstabulation
Stock option NE
No
Yes
Total
Stock
option OE
No
63
43.4%
67
46.2%
130
89.7%
Total
Yes
5
3.4%
10
6.9%
15
10.3%
68
46.9%
77
53.1%
145
100.0%
On average managerial jobs in the New economy are characterized, for our sample, by
much higher values of all the considered variables with respect to the last job held in the
old economy: greater levels of economic responsibility (in 41% of the cases was
largely superior, in 35% superior) and , somehow surprisingly, larger number of people
to supervise as well (it increased in 61% of the cases); autonomy and independence in
work increased but to a lesser extent ( largely greater for 13%, greater for 37%), perhaps
also because, for 57% of the managers, the extension of decision rights has been
accompanied by more intense or much more intense teamwork. and increased time
devoted to technical and professional problem solving (64%).
CONCLUSIONS
This research contributes in understanding the new challanges and forms in the
governance of work and human resource relations posed by the raise of a ‘human capital
intensive’ economy. There, with more intensity than in other parts of the economy,
those relations are resource investment relations rather than service exchange relations.
Accordingly we have argued and shown that they are effectively governed by a range of
‘associational contracts’ characterized by a diffusion of property rights rather than of
28
‘exchange contracts’.
The research has advanced a typology of those associational
governance arrangements, because, as in the case of exchange contracts, they are not all
alike. In particular, associational governance in innovative and risky settings is faced
with contrasting demands and should respond to various trade-offs. This research has
contributed in identifying and providing initial empirical evidence about the following.
-
The diffusion of property rights is realized in forms that reward human capital
investments at the time avoiding excessive risk-bearing on thir part. So, we find a
fair amount of differentiation between human capital providers and financial capital
providers, substantive ‘insurance premiums’ incorporated in base fixed income,
prevalence of ‘low risk’ forms of contingent compensation (as stock options) over
more risk transferring ones (straight individual/group pay for performance).
-
The diffusion of economic property rights is accompanied by a diffusion of decision
and control organizational rights, but often in the form of shared rights. This may
also have a risk reduction function, and it is expected and confirmed as an effective
arrangement in novel and highly professionalized activities, where group problem
solving is generally likely to generate better solutions. Those results are consistent
with other comparable evidence on ‘science based’ industries (Laursen and Manke
2001), in which it has also been found that the innovativeness of activities calls for
both a more intense use of teaming as a governance mechanisms and for more
‘enterpreneurial’ governance (more variable pay, stock options and incentive
intensity).
-
The specificity of human investments, the need for finding novel combinations of
resources to start new ventures, the difficulty of evaluating those combinations of
29
assets ex-ante, pose contrasting requirements on the governance of human capital
mobility. These are responded to by hybridizing ‘internal’ and ‘external’ human
capital ‘markets’. The predominant mode of governing human capital access to new
ventures consists of a range of
‘network forms’. Among those, professional
competence-base forms largely dominate over social loyalty-based forms, and
‘quasi-internal’ (former co-workers) and ‘quasi-external’ (former clients and
suppliers) configurations are much more diffused than more market-like brokered or
certified matches, as theoretically expected.
30
Appendix 1
In our analysis of job transitions to jobs in the New Market, we adopted an event-history approach
(Barnett, Baron, Stuart, 2000; Carroll, Mosakowski, 1987) where the instantaneous rate of movement into
New Economy is the dependent variable. This approach originated from work by Coleman (1981) and
Tuma and Hannan (1984) and found diffuse adoption in previous work on job mobility.
In previous empirical research rates of job change exhibit duration dependence (Sorenson, Tuma,
1981). Therefore, we chose a parametric description of duration dependence, and employed in our
analysis a Weibull model of time dependence; this model implies that the logarithm of the exit rate is a
linear function of the logarithm of duration.
Hazard rate, i.e. the probability per time unit that a case that has been operating in a non-New Market
organizations to the beginning of the interval will move to a New Market position in that interval, in this
model is defined as:
h(t) = p (t) p-1
The Weibull model implies a monotonic age dependence, where p provides an estimate of age
dependence in hazard rate; that is a liability of aging strictly rising (p>1) or strictly decreasing (p<1).
The effect of external covariates, xi on the hazard function can be incorporated in the formulation of
the model by:
 = exp (-’x)
31
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This is the main difference between the typology advanced in Figure 2 and Williamson’s earlier
elaborations on the matter. We are going to separate the conditions where those investments occur, in
order to develop a more fine grained portfolio of governance arrangements. Implicitly, the criticism to
Williamson is that neither asset specificity nor opportunism are necessary to explain the basic differences
between exchange contracts governing employment relations; and that he neglected the possibility of
associational contracts all together where those specific investments are made.
2
Civil law systems seem to be richer, and more tightly linked to economic and organizational differences,
in those respects than Common Law ones. For example the Italian law does distinguish between
‘contratti di scambio’ and ‘contratti di associazione’; as well as it distinguishes, and treat differently,
‘enterpreneurial firms’ (where there are owner-managers investing their ‘organizing and directive
capabilities’ and bearing the risk of the chosen and combinations of resources) from other types of firm
(capitalistic and collective).
3
Williamson ‘s typology of the governance mechanisms for ‘human assets’ and employment relations
was firstly extended to include associational contracts in Grandori (2001) and it is here further refined to
distinguish human asset investment relations from labor service exchange relations.
4
Many studies showed how not searching is the most common method of "job search", with percentages
ranging from 51% (Hanson and Pratt, 1992) of people not having searched for their actual job, up to
63,8% for managers and to 60,2% for jobs in the highest income category (Watanabe, 1989).
1
34
5
Those findings are consistent with the idea that "because new entrants have not yet worked, they do not
have a highly developed contact network that could relay detailed information about their skills and
personality to prospective employers" (Granovetter, 1995: 166).
6
A specific analysis of the industry and functional boundaries of these careers is conducted in Bagdadli
et al, 2001.
7
Looking for some further data supporting this contention, we did find a regression analysis of firm
performance on the level of non systematic stock market risk and the incidence of pay for performance,
showing a significant negative relation, in a study by Bloom and Milkovich (1998) on large US firms.
35