Worker visibility and firms' retention policies

• Date: 01 February 2021
• Author: Matthias Kräkel,Simon Dato,Andreas Grunewald
• Published date: 01 February 2021
• DOI: http://doi.org/10.1111/jems.12404

J Econ Manage Strat. 2021;30:168–202.168

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wileyonlinelibrary.com/journal/jems

Received: 18 January 2019

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Revised: 7 October 2020

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Accepted: 7 October 2020

DOI: 10.1111/jems.12404

ORIGINAL ARTICLE

Worker visibility and firms' retention policies

Simon Dato

1

|Andreas Grunewald

2

|Matthias Kräkel

1

1

Institute for Applied Microeconomics,

University of Bonn, Bonn, Germany

2

Department of Economics, Frankfurt

School of Finance and Management,

Frankfurt, Germany

Correspondence

Simon Dato, University of Bonn, Institute

for Applied Microeconomics,

Adenauerallee 24‐42,

D‐53113 Bonn, Germany.

Email: simdato@uni-bonn.de

Funding information

Deutsche Forschungsgemeinschaft,

Grant/Award Number: SFB/TR 15;

Germany's Excellence Strategy,

Grant/Award Number: EXC 2126/

1‐390838866

Abstract

In the last two decades, the widespread use of web‐based social networks has

led to a higher visibility of workers to the labor market. We theoretically and

experimentally analyze the consequences of such increased labor market

transparency for the efficiency of job assignments, the wages of workers, and

firm profits. Our theoretical results show that higher visibility of workers

increases the efficiency of job assignments, leads to a redistribution of income

between workers of different ability, and increases overall surplus. Our ex-

perimental findings generally support the theoretical results with the exception

that increased visibility leads to higher worker turnover such that surplus does

not increase.

1|INTRODUCTION

Human resources belong to the most important factors that guarantee long‐term success of firms (e.g., Baron &

Kreps, 1999; Lazear & Gibbs, 2009). One of a firm's primary goals is therefore to hire and retain workers of high ability.

However, once workers are successful on their job, they might receive poaching offers from other firms (Kim, 2014;

Lazear, 1986). For a worker, the likelihood of receiving an outside offer crucially depends on the extent to which

alternative employers are aware of his existence and performance, that is on how visible he is to the labor market.

Worker visibility is closely related to search costs in the labor market, as low search costs lead to more search for better

employer–worker matches. In the last decade, digitalization in general and the widespread use of web‐based social

networks like LinkedIn, ResearchGate, and XING, in particular, have drastically reduced search costs for employers

and employees (Goldfarb & Tucker, 2019), and therefore substantially increased the visibility of a firm's workers to

potential competitors (Buettner, 2017; Mukherjee & Vasconcelos, 2018).

1

In this paper, we analyze and experimentally test a stylized labor market model to discuss the implications of higher

worker visibility on the firms' optimal retention policies, firm profits, and overall efficiency. The corresponding results

do not only address consequences of technological change in the labor market but may also lead to new insights into

differences in the retention policies across firms or industries that systematically differ in worker visibility. A number of

additional factors affect worker visibility across firms. For example, firms might differ in their corporate culture. While

some firms have a strict understanding of hierarchy such that only executives represent the firm's interests in the

public, others might implement a more liberal culture such that also nonexecutives frequently act as public re-

presentatives of the firm. Similarly, worker visibility might also systematically vary across industries. In industries in

which teamwork plays an important role when dealing with key customers, such as advertising or consulting, results

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This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided

the original work is properly cited.

© 2020 The Authors. Journal of Economics & Management Strategy published by Wiley Periodicals LLC

are often presented by teams of executives and nonexecutives so that the latter are more visible than in industries

without teamwork at the top.

We build on the seminal paper by Waldman (1984), who differentiates between executive and nonexecutive jobs.

The setting by Waldman assumes asymmetric employer information, that is, only the worker's current employer knows

his ability while all alternative employers can only observe his job assignment (for similar settings, see e.g., Dato

et al., 2016; DeVaro & Waldman, 2012; Gürtler & Gürtler, 2015; Owan, 2004; Waldman, 1984; Zabojnik &

Bernhardt, 2001). Importantly, in the setting of Waldman (1984) workers are perfectly visible both on executive and on

nonexecutive jobs. We extend this model by allowing for workers on executive jobs (e.g., a CEO) to be more visible than

workers on nonexecutive jobs (e.g., their assistants), that is, the existence of the former is observed with a higher

probability by alternative employers than the existence of the latter.

This extension of the framework seems natural because executives appear on the Internet more prominently than

nonexecutives. According to Flyverbom (2016) and Flyverbom et al. (2016), executives have to be visible to key

customers and other stakeholders implying that they appear on the organizational chart of a corporation, typically

including a picture and their CV. Non‐executives, however, are often not individually visible on the organizational chart

but rather subsumed under labels such as “support”or “service”(Lawton, 2016). In many professional careers,

employees thus become visible at the time when being promoted out of a group to a position with personnel re-

sponsibilities. For example, in a sales division, members of the salesforce become more visible when they become a

sales manager, and in project management a team member becomes more visible when being appointed to the position

of the project manager.

In the following, we will analyze how an increase in the general degree of worker visibility affects firms' retention

policies. As executives are already highly visible due to their high position on the hierarchical ladder, we assume that an

increase in the general degree of worker visibility enhances the visibility of nonexecutives more strongly as compared to

executives. In a first step, we show that irrespective of the degree of worker visibility the firm's job‐assignment decision

will follow a cut‐off strategy in equilibrium such that it assigns a worker to the nonexecutive job at the low hierarchy

level if and only if his ability is below a certain threshold. Furthermore, the equilibrium cut‐off is inefficiently high, that

is the current employer's promotion rate is inefficiently low.

The analysis of our theoretical model yields three main results. First, we show that higher worker visibility induces

the current employer to adjust the promotion cut‐off downward, leading to a less inefficient promotion policy. In-

tuitively, higher visibility makes it less attractive for the current employer to inefficiently assign a worker to the low

hierarchy level for reducing his probability of being poached. Consider, for example, the two polar cases of zero and full

visibility at the low hierarchy level. If a worker at the lower hierarchy level is completely invisible to alternative

employers, the current employer will intensely use inefficient job assignment to prevent poaching offers. If, however,

the worker is fully visible at the low hierarchy level, inefficient job assignment is ineffective to hide a worker and is,

thus, only used to prevent a positive signal on the worker's unobservable ability.

Second, in our stylized model, increased worker visibility leads to an income redistribution between workers of

different ability. Due to the decrease of the equilibrium cut‐off, workers of intermediate ability are promoted to the

executive job instead of being inefficiently assigned to the nonexecutive job. Workers with high ability, who will be

promoted regardless of the exact degree of visibility, suffer from an increase in visibility. As they are now pooled with

workers of intermediate ability at the executive job, their expected ability from the perspective of alternative employers

decreases and so does their equilibrium wage. For workers with low ability, whose job assignment is not affected, the

increase in visibility has a direct positive and an indirect negative effect on the expected wage. The direct positive effect

originates from the fact that they are visible and receive poaching offers more often. Accordingly, the current employer

has to match poaching offers more often, which leads to a higher expected wage. As they are no longer pooled with

intermediate ability types, however, alternative employers expect workers at the nonexecutive job to be less able, which

leads to a lower retention wage in equilibrium. Overall, this negative effect turns out to be second order such that

workers with low ability benefit from an increase in visibility. Workers of intermediate ability, who are promoted to the

executive job as a result of the increase in visibility, benefit the most. First, they are assuredly visible on the executive

job such that they always receive a positive wage. Second, they are pooled with workers of high ability instead of being

pooled with workers of low ability on the nonexecutive job. Accordingly, their wage on the executive job is higher than

on the nonexecutive job. Overall, income is redistributed from workers of high ability to their counterparts with low

and intermediate ability. As workers with intermediate ability benefit the most, the income effect is nonmonotonic in

ability.

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Third, current employers will earn lower profits if workers become more visible to the labor market, because higher

worker visibility leads to more poaching by alternative employers and, thus, higher wage costs. While current em-

ployers suffer from the increased wage payments, the overall surplus produced by the workers rises as a consequence of

more efficient job assignment. As the overall surplus increases but firm profits decrease, it is also clear that workers on

average benefit from higher visibility. Thus, increases in visibility, for example due to digitalization, may also lead to a

redistribution of income from employers to workers.

All three results provide testable predictions about the implications of higher worker visibility on firms' retention

policies. The second part of our paper tests these predictions by conducting a laboratory experiment. The degree of

worker visibility in the field depends on an unmanageable variety of factors, and the resulting optimal mix of job

assignment and retention wage offers will be inherently correlated with the firm's structure, its job offers, and the pool

of workers it has employed. A laboratory setting, however, enables us to exogenously manipulate worker visibility,

which allows us to identify causal implications of changes in the visibility of workers. For this purpose, we build upon a

simple experimental labor market with one subject being in the role of a current employer and two subjects being in the

role of alternative employers, who can poach the current employer's worker.

2

We differentiate between two treatments,

which concentrate on the two polar cases of our model setup. In invisibility, workers on nonexecutive jobs are observed

by alternative employers with probability zero, that is workers cannot be poached. In visibility, workers on nonexecutive

jobs are perfectly visible for alternative employers. In both treatments, assignment of a worker to the executive job

makes the worker perfectly visible for alternative employers.

The experimental results are generally in line with the derived theoretical hypotheses. Concerning our finding on

the optimal promotion policy, in both invisibility and visibility the vast majority of current employers uses a cut‐off rule

to determine job assignment. In line with our first main theoretical result, this cut‐off is significantly lower in visibility

compared to invisibility. Hence, increased visibility leads to less inefficient job assignments in our experimental labor

market. Second, we observe a heterogeneous treatment effect with respect to workers' income which is nonmonotonic.

The income of low ability types significantly increases from invisibility to visibility. The same is true for workers of

intermediate ability. However, the beneficial effect for their income is significantly larger than the effect for workers of

low ability. On the contrary, we observe that workers of high ability earn less in visibility than in invisibility. Finally, we

hypothesized that increased visibility improves overall surplus. This hypothesis is not supported by the experimental

findings.

We discuss our results and conduct several robustness checks in Section 6. We show that the missing relationship

between visibility and surplus in the experimental data can be traced back to the occurrence of turnover. In our setting,

workers can rely on firm‐specific human capital such that they are more productive at their current employer compared

to alternative employers. While theory therefore predicts that, in equilibrium, workers should stay with their current

employer, we find substantial turnover in both treatments. Observed turnover is higher in visibility than in invisibility.

As a consequence, increased visibility of workers yields a more inefficient assignment of workers across firms which

can offset the positive surplus effects from less inefficient job assignment within firms. In our data, these two effects

cancel out each other. Interestingly, the increase in turnover does not only decrease overall surplus but also reduces the

earnings of alternative employers. In visibility, where turnover is high, they seem to suffer from a phenomenon similar

to the winner's curse: on average they realize negative profits in case of winning the wage competition for the worker.

3

Invisibility of workers reduces their opportunity to engage in such wage competitions and thereby alleviates the

associated negative profits.

As we concentrate on the two polar cases of our model setup in the main treatments, we consider an additional

experimental setting in which nonexecutives are observable by alternative employers with probability 0.5 in Section 6.3

as a first robustness check. The corresponding results corroborate the findings from our main experiment. Second, we

endogenize visibility in a modified version of our theoretical model in Section 6.4 by allowing workers to invest in their

visibility. We show that an increase in the endogenously acquirable visibility negatively affects the promotion cut‐off,

which reiterates the effect of exogenous visibility. Furthermore, our results reveal that, contrary to exogenous visibility,

an increase in endogenous visibility might be surplus‐decreasing.

Our approach analyzes the impact of increased worker visibility on firms' optimal retention policies to shield

workers from poaching offers by alternative employers. Thereby, it complements a number of papers that address

employee poaching but focus on wage rises as the key instrument to retain workers. The seminal paper by Waldman

(1984) and the subsequent papers building on it (e.g., Dato et al., 2016; DeVaro & Waldman, 2012; Ghosh & Wald-

man, 2010; Gürtler & Gürtler, 2015; Waldman, 1996; Waldman & Zax, 2016) consider asymmetric employer learning

where poaching firms are less informed about a worker's ability compared to the worker's current employer.

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