Firm-specific worker incentives, employee retention, and wage–tenure slopes

Summary

Kryscynski's 2021 paper, "Firm-specific worker incentives, employee retention, and wage–tenure slopes," delves into a previously underexplored area of strategic human resource management: firm-specific worker incentives. Building on existing scholarship that has heavily focused on firm-specific human capital, the author proposes that firm-level incentives can also possess a unique "firm specificity," thereby offering a distinct pathway to competitive advantage. These incentives are defined as those that "provide more utility to workers in the focal firm than similar incentives available at other employers." The core argument is that such incentives can influence employee retention and compensation structures independently of the firm-specificity of an employee's skills and knowledge. The methodology employed in the study involved analyzing a proprietary dataset. This dataset included information from 284 software development firms, coupled with matched employee-level compensation data for 8,208 software developers across 99 of these firms. This rich empirical foundation allowed for a rigorous examination of the relationship between the specificity of incentive bundles, employee turnover, and the trajectory of wage increases over an employee's tenure. The use of real-world firm and employee data provides robust support for the theoretical propositions put forth by the author. The findings indicate that firms incorporating higher firm specificity into their incentive structures experience several key benefits. Specifically, these firms demonstrate lower rates of dysfunctional employee turnover, meaning they are more effective at retaining employees they wish to keep. Furthermore, the study reveals that such firms also exhibit lower wage-tenure slopes. This suggests that companies leveraging firm-specific incentives can maintain a desirable workforce without needing to offer continually escalating wages comparable to their labor market competitors. The implication is that firm-specific incentives serve as a viable and strategic alternative for achieving human capital-based competitive advantages, allowing firms to differentiate their value proposition to employees beyond mere financial compensation.