Are Employee Selection and Incentive Contracts Complements or Substitutes?

Margaret A. Abernethy, Henri Dekker, Axel K-D. Schulz

Research output: Contribution to journalJournal articleResearchpeer-review

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.
Original languageEnglish
JournalJournal of Accounting Research
Volume53
Issue number4
Pages (from-to)633-668
Number of pages36
ISSN0021-8456
DOIs
Publication statusPublished - Sep 2015
Externally publishedYes

Keywords

  • D22
  • D23
  • D83
  • M41
  • Employee selection
  • Incentive contracting
  • Strategy
  • Organizational learning
  • Volatility

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