US

Personnel Economics

Edward Lazear passed away in November 2020 at the age of 72, mourned by many in the worlds of economic research and policy-making. Described by two close colleagues and co-authors at Stanford as ‘the first personnel economist’, he was also a founding member of IGM’s US panel and an important contributor to launching our project of polling economics experts on vital policy issues.

To mark the sad occasion, we invited both our US and European panels to express their views on aspects of Eddie’s work. We asked the experts whether they agreed or disagreed with the following statements, and, if so, how strongly and with what degree of confidence:

(a) Our understanding of labor productivity has been much enhanced by accounting for monetary and promotion-based incentives within firms and related selection effects.

(b) Large salaries for senior business executives are less a reflection of an individual’s current contribution to a firm’s overall performance than a ‘prize’ for those who put in the effort to achieve one of the top positions.

Of our 43 US experts, 40 participated in this survey; of our 48 European experts, 39 participated – for a total of 79 expert reactions.

Incentives and selection effects within firms

On the first statement, an overwhelming majority agreed on the importance of accounting for incentives and selection effects within firms as influences on labor productivity. Weighted by each expert’s confidence in their response, 48% of the US panel strongly agree, 50% agree, and 2% disagree. Among the European panel (again weighted by each expert’s confidence), 35% strongly agree, 58% agree, and 7% are uncertain. Overall, across both panels, 42% strongly agree, 54% agree, 3% are uncertain, and 1% disagree.

Among the short comments that the experts are able to include in their responses, Caroline Hoxby at Stanford says: ‘This is one of the many insights due to the great and (sadly) late Eddie Lazear. He will be missed as a mind and a colleague. Ave, Eddie.’ Nicholas Bloom at Stanford adds: ‘Eddie’s work has been hugely influential in this – for example, the management literature I know well directly built on personnel economics.’ And Anil Kashyap at Chicago notes: ‘This could have been a Nobel prize summary citation. Eddie was a giant and will be sorely missed.’

Several panelists drew our attention to key papers. Oliver Hart at Yale comments: ‘Eddie Lazear’s work on this topic has been very insightful. I would mention particularly his American Economic Review article on Safelite.’ And Christian Leuz at Chicago points to Eddie’s presidential address to the Society of Labor Economists in 1998 on past lessons and future directions for personnel economics; and his 2018 Journal of Economic Perspectives overview of work on compensation and incentives in the workplace.

Of the few experts who say they are uncertain, Franklin Allen at Imperial explains his thinking thus: ‘Still a contentious area I would say. Countries such as Japan don’t have high-powered incentives but still do fairly well it seems.’ And while Daron Acemoglu at MIT agrees with the statement, he notes: ‘But norms, morale and non-monetary incentives matter greatly inside organizations, and monetary incentives can sometimes erode/disrupt them.’

Large remuneration packages as tournament prizes

On the second statement about ‘rank-order tournaments’ (ROT) and whether large salaries for senior business executives are less a reflection of an individual’s current contribution to a firm’s overall performance than a ‘prize’ for those who put in the effort to achieve one of the top positions, a little over a half of the experts agreed, somewhat under a half were uncertain, and a small number disagreed.

Of the US panel (again weighted by each expert’s confidence in their response), 8% strongly agreed, 41% agreed, 39% were uncertain, 8% disagreed, and 5% strongly disagreed. The results were fairly similar for the European panel: 4% strongly agreed, 59% agreed, 28% were uncertain, and 10% disagreed. Overall, across both panels, 6% strongly agreed, 50% agreed, 33% were uncertain, 9% disagreed, and 2% strongly disagreed.

Of those who agree, Caroline Hoxby advises: ‘This is one of Eddie Lazear and Sherwin Rosen’s most insightful papers. Read it.’ Pete Klenow at Stanford links to Eddie’s 1981 study of agency, earnings profiles, productivity, and hours restrictions. And Peter Neary at Oxford directs us to an overview of tournament theory, noting: ‘With some allowance for performance bonuses, the statement is accurate for many organizations. This is not necessarily desirable though.’

Others who agree have similar concerns. Daron Acemoglu states: ‘Big caveat: that “effort” is often non-productive as well, for example, networking, connections, bending rules, and getting credit for others’ work.’ Richard Thaler at Chicago adds: ‘“Prize” for those who put in the effort to achieve one of the top positions. So a prize for campaigning. Plus luck. *Not* =value created.’ And Christian Leuz mentions: ‘Other factors (including ‘luck’) can play a role.’

Several who agree with the statement make a distinction between internal tournaments for career advancement and the global market for senior executives. Kjetil Storesletten at Oslo comments: ‘Wages for top executives reflect firms’ competition for top talent as well as long-term aspects of contracts, including tournaments.’ Robert Shimer at Chicago adds: ‘This is correct for internal promotions. Less so for the global market for CEOs.’ And Bengt Holmstrom at MIT states: ‘Not sure it is a prize a la tournament theory, as much as it reflects market value as several studies suggest.’

Panelists who say they are uncertain also point to context. Antoinette Schoar at MIT says: ‘Whether tournament component of salary is more important than compensation for effort depends on context.’ Larry Samuelson at Yale agrees: ‘Senior salaries are set in thin markets by negotiation or other processes with performance hard to measure; so are difficult to characterize.’ And Oliver Hart notes: ‘Promotion to a high salary position can be an important incentive but a high salary can be paid because an executive has a scarce talent.’

Finally, two panelists who disagree add comments. David Autor at MIT puns: ‘Much as I like the ROT hypothesis, I doubt it’s the main explanation for the rot-ten excess of executive pay in the US.’ And Abhijit Banerjee at MIT returns to the theme of luck: ‘Often it’s neither of the given options. Just rents you capture by being in the right place at the right time, or pure windfalls.

All comments made by the experts are in the full survey results. And in addition to the VoxEU column on Eddie’s life and work by his colleagues Paul Oyer and Kathryn Shaw, two members of our European panel – Imran Rasul and University College London and Oriana Bandiera at LSE – have published an obituary on the Royal Economic Society website.

Romesh Vaitilingam
@econromesh
January 2020

Question A:

Our understanding of labor productivity has been much enhanced by accounting for monetary and promotion-based incentives within firms and related selection effects.

Responses weighted by each expert's confidence

Question B:

Large salaries for senior business executives are less a reflection of an individual’s current contribution to a firm’s overall performance than a ‘prize’ for those who put in the effort to achieve one of the top positions.

Responses weighted by each expert's confidence

Question A Participant Responses

Participant University Vote Confidence Bio/Vote History
Acemoglu
Daron Acemoglu
MIT
Agree
6
Bio/Vote History
But norms, morale and non-monetary incentives matter greatly inside organizations, and monetary incentives can sometimes erode/disrupt them.
Altonji
Joseph Altonji
Yale
Strongly Agree
8
Bio/Vote History
Auerbach
Alan Auerbach
Berkeley
Agree
5
Bio/Vote History
Autor
David Autor
MIT
Strongly Agree
10
Bio/Vote History
Rank order tournaments, performance pay and sorting, sorting in experiments. These are classic insights.
Baicker
Katherine Baicker
University of Chicago
Strongly Agree
3
Bio/Vote History
Banerjee
Abhijit Banerjee
MIT
Agree
6
Bio/Vote History
Bertrand
Marianne Bertrand
Chicago
Strongly Agree
8
Bio/Vote History
Brunnermeier
Markus Brunnermeier
Princeton Did Not Answer Bio/Vote History
Chetty
Raj Chetty
Harvard Did Not Answer Bio/Vote History
Chevalier
Judith Chevalier
Yale Did Not Answer Bio/Vote History
Cutler
David Cutler
Harvard
Strongly Agree
10
Bio/Vote History
The late Eddie Lazear was a pioneer in this area.
Deaton
Angus Deaton
Princeton
Agree
6
Bio/Vote History
Duffie
Darrell Duffie
Stanford
Agree
1
Bio/Vote History
Edlin
Aaron Edlin
Berkeley
Agree
7
Bio/Vote History
Eichengreen
Barry Eichengreen
Berkeley
Agree
3
Bio/Vote History
Einav
Liran Einav
Stanford
Agree
3
Bio/Vote History
Fair
Ray Fair
Yale
Agree
5
Bio/Vote History
Finkelstein
Amy Finkelstein
MIT
Agree
5
Bio/Vote History
Goldberg
Pinelopi Goldberg
Yale
Strongly Agree
7
Bio/Vote History
Goolsbee
Austan Goolsbee
Chicago
Strongly Agree
8
Bio/Vote History
Greenstone
Michael Greenstone
University of Chicago
Agree
7
Bio/Vote History
Hall
Robert Hall
Stanford
Agree
6
Bio/Vote History
Hart
Oliver Hart
Harvard
Strongly Agree
10
Bio/Vote History
Eddie Lazear's work on this topic has been very insightful. I would mention particularly his AER article on Safelite.
Holmström
Bengt Holmström
MIT
Agree
6
Bio/Vote History
Hoxby
Caroline Hoxby
Stanford
Strongly Agree
10
Bio/Vote History
This is one of the many insights due to the great and (sadly) late Eddie Lazear. He will be missed as a mind & a colleague. Ave, Eddie.
Hoynes
Hilary Hoynes
Berkeley
Agree
8
Bio/Vote History
Judd
Kenneth Judd
Stanford
Agree
8
Bio/Vote History
Kaplan
Steven Kaplan
Chicago Booth
Strongly Agree
8
Bio/Vote History
Kashyap
Anil Kashyap
Chicago Booth
Agree
3
Bio/Vote History
Depends on what much means, but this could have been a Nobel prize summary citation. Eddie was a giant and will be sorely missed.
Klenow
Pete Klenow
Stanford
Strongly Agree
3
Bio/Vote History
Levin
Jonathan Levin
Stanford
Strongly Agree
4
Bio/Vote History
Maskin
Eric Maskin
Harvard
Agree
7
Bio/Vote History
Nordhaus
William Nordhaus
Yale
Disagree
4
Bio/Vote History
Obstfeld
Maurice Obstfeld
Berkeley
Strongly Agree
5
Bio/Vote History
Saez
Emmanuel Saez
Berkeley
Agree
4
Bio/Vote History
Samuelson
Larry Samuelson
Yale
Agree
8
Bio/Vote History
Scheinkman
José Scheinkman
Columbia University
Agree
6
Bio/Vote History
Schmalensee
Richard Schmalensee
MIT
Strongly Agree
5
Bio/Vote History
Shapiro
Carl Shapiro
Berkeley
Agree
2
Bio/Vote History
Shimer
Robert Shimer
University of Chicago
Strongly Agree
8
Bio/Vote History
Stock
James Stock
Harvard
Agree
3
Bio/Vote History
Thaler
Richard Thaler
Chicago Booth
Agree
1
Bio/Vote History
Udry
Christopher Udry
Northwestern
Strongly Agree
5
Bio/Vote History

Question B Participant Responses

Participant University Vote Confidence Bio/Vote History
Acemoglu
Daron Acemoglu
MIT
Agree
6
Bio/Vote History
Big caveat: that "effort" is often non-productive as well, e.g., networking, connections, bending rules, and getting credit for others' work
Altonji
Joseph Altonji
Yale
Agree
7
Bio/Vote History
Auerbach
Alan Auerbach
Berkeley
Uncertain
3
Bio/Vote History
Autor
David Autor
MIT
Disagree
6
Bio/Vote History
Much as I like the ROT hypothesis, I doubt it's the main explanation for the rot-ten excess of executive pay in the U.S.
Baicker
Katherine Baicker
University of Chicago
No Opinion
Bio/Vote History
Banerjee
Abhijit Banerjee
MIT
Disagree
6
Bio/Vote History
Often its neither of the given options. Just rents you capture by being in the right place at the right time, or pure windfalls.
Bertrand
Marianne Bertrand
Chicago
Uncertain
6
Bio/Vote History
Brunnermeier
Markus Brunnermeier
Princeton Did Not Answer Bio/Vote History
Chetty
Raj Chetty
Harvard Did Not Answer Bio/Vote History
Chevalier
Judith Chevalier
Yale Did Not Answer Bio/Vote History
Cutler
David Cutler
Harvard
Agree
6
Bio/Vote History
Deaton
Angus Deaton
Princeton
Agree
6
Bio/Vote History
Duffie
Darrell Duffie
Stanford
Uncertain
4
Bio/Vote History
Both play an important role, but I'm not confident which is more important.
Edlin
Aaron Edlin
Berkeley
Disagree
3
Bio/Vote History
Eichengreen
Barry Eichengreen
Berkeley
Agree
3
Bio/Vote History
Einav
Liran Einav
Stanford
Uncertain
1
Bio/Vote History
Fair
Ray Fair
Yale
Agree
5
Bio/Vote History
Finkelstein
Amy Finkelstein
MIT
Agree
3
Bio/Vote History
Goldberg
Pinelopi Goldberg
Yale
Uncertain
5
Bio/Vote History
True in some settings, but not in others.
Goolsbee
Austan Goolsbee
Chicago
Uncertain
6
Bio/Vote History
Greenstone
Michael Greenstone
University of Chicago
Uncertain
2
Bio/Vote History
Hall
Robert Hall
Stanford
Agree
5
Bio/Vote History
Hart
Oliver Hart
Harvard
Uncertain
10
Bio/Vote History
Promotion to a high salary position can be an important incentive but a high salary can be paid because an executive has a scarce talent.
Holmström
Bengt Holmström
MIT
Agree
6
Bio/Vote History
Not sure it is a prize a la tournament theory, as much as it reflects market value as several studies suggest.
Hoxby
Caroline Hoxby
Stanford
Strongly Agree
10
Bio/Vote History
This is one of Eddie Lazear's and Sherwin Rosen's most insightful papers. Read it.
Hoynes
Hilary Hoynes
Berkeley
Uncertain
8
Bio/Vote History
Judd
Kenneth Judd
Stanford
Agree
6
Bio/Vote History
Kaplan
Steven Kaplan
Chicago Booth
Strongly Disagree
9
Bio/Vote History
Kashyap
Anil Kashyap
Chicago Booth
Uncertain
3
Bio/Vote History
Varies across firms, for sure the tournaments are important, but for the average public company hard for me to say if they dominant.
Klenow
Pete Klenow
Stanford
Agree
3
Bio/Vote History
Levin
Jonathan Levin
Stanford
Uncertain
3
Bio/Vote History
Maskin
Eric Maskin
Harvard
Agree
5
Bio/Vote History
Nordhaus
William Nordhaus
Yale
Uncertain
3
Bio/Vote History
Not the only choices.
Obstfeld
Maurice Obstfeld
Berkeley
Strongly Agree
5
Bio/Vote History
Saez
Emmanuel Saez
Berkeley
Agree
6
Bio/Vote History
Samuelson
Larry Samuelson
Yale
Uncertain
1
Bio/Vote History
Senior salaries are set in thin markets by negotiation or other proceses with performance hard to measure; so are difficult to characterize.
Scheinkman
José Scheinkman
Columbia University
Uncertain
7
Bio/Vote History
Schmalensee
Richard Schmalensee
MIT
Uncertain
5
Bio/Vote History
The "prize" effect is real, but do we really know that it is the dominant effect?
Shapiro
Carl Shapiro
Berkeley
Uncertain
3
Bio/Vote History
Shimer
Robert Shimer
University of Chicago
Agree
5
Bio/Vote History
This is correct for internal promotions. Less so for the global market for CEOs.
Stock
James Stock
Harvard
Agree
3
Bio/Vote History
Thaler
Richard Thaler
Chicago Booth
Agree
5
Bio/Vote History
"‘prize’ for those who put in the effort to achieve one of the top positions". So a prize for campaigning. Plus luck. *Not* =value created.
Udry
Christopher Udry
Northwestern
Uncertain
6
Bio/Vote History