Personnel policy and profit

There is a growing awareness of large differences in worker turnover and pay between firms. However, there is little knowledge about the effects of this on firm performance. This paper describes how personnel policies with respect to pay, tenure, and worker flows are related to economic performance of the firm. Here we follow the population of 7118 medium- to large-sized private sector Danish firms over the period 1992-1995. In an instrumental variables framework, we use changes in the personnel composition of different firms operating in the same local labour market to provide exogenous identifying personnel structure variation. It is found that personnel policy is strongly related to economic performance. At the margin, more hires are associated with lower profit, and more separations with higher profit. For the average firm, one new job, all else equal, is associated with 2680 euros (2000 prices) lower annual profit. Higher wage level and lower wage growth are associated with higher profit. A workforce that has less tenure, all else equal, is more profitable. (C) 2003 Elsevier Inc. All rights reserved.