Employee Selection Practices and Performance Pay

Abstract

Information asymmetry regarding the degree of congruence between employee and organizational goals can result in problems with both moral hazard and adverse selection. The empirical research in management control systems focuses on mitigating problems due to information asymmetry in current employees, ex post of the hire date. However, both economics and management literature acknowledge that there is significant variation in employees’ goal congruence even prior to hire. I examine the effectiveness of employee selection practices in resolving the information asymmetry regarding an applicant’s ex ante goal congruence. I find that more extensive use of employee selection practices intended to identify goal congruence is positively associated with future employee performance. Further, I find that the association between employee selection practices and performance is weaker in firms that use performance pay in the initial employment contract. Interestingly, I also find a positive association between employee selection practices and use of performance pay in initial contracts.