Superstars or White Elephants? Retention of Extreme Performers and Firm Performance
Ms. Wan-Ting CHIU
This paper revisits the well-established notion that valuable human resources cannot be sources of sustained competitive advantage unless firms manage the threat of employee turnover. Focusing on workers that have extreme performance, I examine how hiring and retaining them affect firm performance. I argue that workers that a firm can hire to create the highest value are not necessarily the ones that allow the firm to capture the largest portion of the value. The tradeoff exists because drivers of value creation and appropriation do not converge when labor markets are imperfect. Incorporating arguments from strategic factor market theory, agency theory and transaction cost economics, I argue that the value firms can create and capture from a worker is in part a result of their competitive behavior in labor markets and in part a result of how effectively they can reduce the agency and transaction costs associated with managing the worker. Exploring the competitive dynamics in labor markets, I argue that not only are extreme performers able to capture a large portion of the value created through high wages, they are also able to do so for prolonged periods. To restrict voluntary turnover, firms have incentives to impose duration safeguards on these employees. Yet binding these employees to long-term contracts lowers firm profitability. The analysis of the National Basketball Association league supports these arguments.