Implicit Incentives for Human Capital Acquisition



The accounting literature has largely recognized the power of effort incentives to increase productivity. However, productivity is much more complex than just being a function of effort. It also depends on the skills and talents people have. That is, productivity cannot only be increased by means of putting in more effort, but also by investments in human capital. Firms are therefore not only interested in incentivizing employees to provide effort, but also to invest in the acquisition of productivity-enhancing skills. We investigate the complementary roles of two personnel control mechanisms, i.e., training and assignment of employees (i.e., promotions), in the active management of employees’ human capital acquisition. In particular, we highlight the role of promotions in incentivizing employees to invest in job-specific human capital. We predict that different skill sets are predictors of different types of promotions. More specifically, training that increases effective ability (productivity) in the current job is predictive of promotions to similar task environments, while training that increases effective ability in the next job, but less so in the current job, is predictive of promotions to different task environments. We further predict that employees with promotion opportunities invest significantly more in those training that increase their chance of promotion than employees without promotion opportunities. Using panel data of a retail bank, we find evidence consistent with our predictions.

This seminar is organised by the Erasmus Accounting Research Group.