Talent management. The role of bosses

Abstract

Managers (“bosses”) are central to the development and allocation of human capital in firms because they train employees and learn about their abilities. While a multi-divisional firm wants to allocate workers to wherever they are most productive, bosses who are rewarded for their units’ performance prefer to hold on to good employees, and the prospect of losing good people weakens the incentives to train them. We derive the optimal incentive contract for bosses that enables a firm to change from “silos” with only upward mobility to a “lattice” with cross-divisional mobility. Compared to silos, a lattice achieves a more efficient allocation of people to positions, but also entails agency costs that may exceed the benefits. We suggest empirical predictions about when silos or a lattice are optimal, and relate our model and its results to examples and evidence.