Marco Tulio Zanini

Trust within Organizations of the New Economy

GABLER EDITION WISSENSCHAFT

International Management StudiesHerausgegeben von Professorin Dr. Birgitta Wolff

Die Schriftenreihe trägt dazu bei, Erkenntnisse aus der internationalenUnternehmensforschung zu verbreiten. Die meisten Beiträge zeichnensich durch eine Fundierung auf die theoretische Basis der NeuenInstitutionenökonomik sowie eine empirische Analyse aus. Die Reiheist offen für Arbeiten in deutscher und englischer Sprache.

The series aims at circulating insights from research projects oninternational corporations. Most of its contributions are characterizedboth by a foundation on a theoretical basis of the New InstitutionalEconomics and an empirical analysis. The series is open to works inGerman and in English.

Marco Tulio Zanini

Trust within Organizations of the New EconomyA Cross-Industrial Study

With a foreword by Prof. Dr. Birgitta Wolff

Deutscher Universitäts-Verlag

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Dissertation Universität Magdeburg, 2007

To

Tulio, Jerusa and Paula

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Foreword

The role of trust in governing institutions has been disputed for years and is likely to continue to be discussed in the future. Increasing uncertainty and people’s personal concerns about future perspectives seem to have created an increasing need for what we call trust. Simulta-neously, the same uncertainty that induces this increased demand for trust seems to be under-mining it: in uncertain environments, trust seems to be much harder to generate. This paradox has been the starting point for the empirical study that is presented in Marco Tulio Zanini’s book. In literature, one can find many different views of trust, e.g. trust as a complement to explicit modes of corporate control, trust as a substitute for explicit corporate control, trust as a “third way”, or trust as a somehow comforting notion that people just preach without having any conceptual framework in mind.

We wanted to find some data that might provide clues for a better understanding of where and under which conditions trust prevails and thrives, and where it does not. In a sample created from an inquiry into seven major companies from different sectors of the Brazilian economy, Marco Tulio Zanini found impressively clear evidence that trust is more likely to be discov-ered where we would assume it to be needed least: in relatively stable, hierarchical, and bu-reaucratic organizations. Comparing data from companies from the “new economy” with those from the “old economy” reveals strong indications that there is comparatively little trust in the new economy firms. This result might inspire further research.

I would like to once more express my gratitude to the seven Brazilian corporations that pro-vided valuable advice, information, and active support in the preparation of this study by al-lowing us to circulate our questionnaire to thousands of employees. Finding a country where access to the major players in important industries can be obtained is quite a challenge. Our appreciation for the cooperation of our Brazilian partners, therefore, cannot be overempha-sized.

Prof. Dr. Birgitta Wolff

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Preface

This book is the result of my research as a doctoral student at the Faculty of Economics and Management of Otto-von-Guericke University of Magdeburg during the period 2003-2007.

I am very grateful to all the members of the Faculty of Economics and Management, and I especially wish to express my sincere gratitude to my thesis supervisor, Prof. Dr. Birgitta Wolff, for her support, encouragement, and help throughout my research project. Without her support and advice there would not be a thesis at all.

I also wish to thank my second advisor, Edward J. Lusk, for his advice as my mentor in statis-tics throughout the entire research project, and Prof. Dr. Ingo Pies as the third reviewer of the dissertation, and as my professor during the cherished time when I attended his lectures at Martin-Luther-Universität Halle-Wittenberg. I also thank Prof. Dr. Carmen P. Migueles and Prof. Dr. Paulo R. Motta for their contributions.

All my colleagues at the Department of International Management, especially Petra Risch, Marjaana Gunkel, Frithjof Pils, Yang Wei, Fan Wu and Christopher Schlägel, deserve to be mentioned for their participation, including my friend Tumenta Kennedy.

This empirical research work was only possible with the cooperation of the participant com-panies. In this sense I would like to express my appreciation and gratitude to the companies who cooperated with us and who have made an invaluable contribution to this research. They were absolutely fundamental to this study. Some of the executives, employees and research team members who made this research project possible have contributed directly with their comments and efforts: Ms. Márcia Magno, Mr. Rodrigo Fonseca, Ms. Silvia Pires Migueles, Mr. Júlio César Fonseca, Mr. Marcelo Arantes, Ms. Sandra Lima, Mr. Helder Luciano de Oli-veira, Mr. Luis Guilherme Schymura, Mr. Ralph Chelotti, Ms. Lady Morais, Mr. Jose Ar-mando Campos, Mr. Luiz Carlos Pimenta, and Ms. Graziella Capone de Palma.

I am grateful for Nicole Gillespie and Isaiah O. Ugboro for allowing the use of the question-naire they have developed.

I would like to place on record my appreciation of the support received from FIRJAN – Rio de Janeiro’s Industry Federation for its institutional support of the research project, and Sex-tante do Brasil Institute for allowing me to use their data.

I acknowledge with gratitude the financial support of the Brazilian government agency CAPES for sponsoring my studies in Germany, and the help of my employer, Fundação Dom Cabral (FDC), for sponsoring the publication of this study.

In conclusion, I have been fortunate in having my family and friends to encourage me during my doctoral studies, mentioning particularly the support of my parents who have, over the years, with the aid of some principles, taught me to sail through troubled waters as well as

X

calm. I also thank those who have been close to me during my doctoral studies, especially Nelma P. Correa.

Dr. Marco Tulio Zanini

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Abstract

Trust is approached in this study as an implicit governance mechanism to coordinate eco-nomic exchange. The objective of the thesis is to understand the effects of different industry-specific institutional framework constraints on the levels of trust within business organiza-tions. Different institutional arrangements might change the comparative costs of governance in different industries, restricting the development of some governance mechanisms and fa-voring others. Specifically, this study aims at understanding the possible differences in the levels of trust between two paradigms: the Old Economy and the New Economy. We argue that singular institutional innovations that better characterize the New Economy, in the form of environmental uncertainty and instability, set considerable constraints on the development of trust. Accordingly, the central hypothesis presented in this study is: “Due to the relatively higher institutional uncertainty and instability, New Economy companies will have a tendency to present lower levels of trust when compared with Old Economy companies.” Moreover, trust lies in the center of relational contracting; by applying the rational choice perspective, the thesis analyzes some additional elements to provide a broad understanding of possible changes; therefore employee commitment and employee turnover are also analyzed.

By approaching trust as a dependent variable in a cross-industrial comparison, a question-naire survey was carried out in the period July-October of 2004 in Brazil assessing the levels of trust and those related elements within seven private companies. The study classified com-panies into three different groups: ‘Old Economy’ companies, ‘New Economy’ companies, and an alternative category. Confirming the central hypothesis, we found significant lower levels of interpersonal trust in the companies operating in the New Economy. The study con-firms the major role of industry-specific institutional frameworks on the development of trust levels within business organizations and concludes that relatively high institutional uncertain-ty and instability limit the development of trust as a governance mechanism within those companies operating in the New Economy. Moreover, the study also found lower levels of employee commitment and high employee turnover rates in those companies. Our results sug-gest that relational contracting has, in the New Economy, given way to a considerable extent to a more transactional contract model.

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Table of Contents

Table of Contents ................................................................................................................. XIII

List of Tables ......................................................................................................................... XIX

List of Figures ....................................................................................................................... XXI

List of Abbreviations ........................................................................................................... XXIII

List of Variables .................................................................................................................. XXIII

Glossary ................................................................................................................................ XXV

1 Objectives and Structure of the Argument ........................................................................... 1

1.1 Thesis Objectives ........................................................................................................ 4

1.2 Relevance of the Study ................................................................................................ 8

1.3 Division of Chapters .................................................................................................... 9

2 Trust from the Economic Perspective ................................................................................ 11

2.1 Trust and Monitoring ................................................................................................ 11

2.2 Cooperation and Trust ............................................................................................... 14

2.3 An Economic Definition of Trust .............................................................................. 17

2.4 Properties of Trust ..................................................................................................... 19

2.4.1 Trust as a Three-Part Relation ......................................................................... 19

2.4.2 Trust as an Expectation .................................................................................... 21

2.4.3 Behavioral Risk ................................................................................................ 23

2.4.4 The Calculative Placement of Trust ................................................................. 25

2.5 Trust within Organizations ........................................................................................ 26

2.5.1 Trust and Transaction Costs ............................................................................ 26

2.5.2 Trust as a Complement for Price and Authority .............................................. 28

2.5.3 Trust and the Corporate Contract .................................................................... 33

2.5.4 Trust as a Motivational Element ...................................................................... 35

2.5.5 Trust as a Mechanism to Reduce Behavioral Risk ........................................... 38

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2.5.6 Relational Contracting as a Trust-Based Contract .......................................... 42

2.6 Trust and Organizational Performance ..................................................................... 45

2.6.1 Advantages of System-Trust ............................................................................. 45

2.6.2 Empirical Contributions to Performance Analysis .......................................... 49

2.6.3 Trust Investment Analysis ................................................................................. 51

2.7 Specific Functions of Trust ....................................................................................... 54

2.7.1 Solving Performance Ambiguity ....................................................................... 54

2.7.2 Enforcement of Employee Commitment ........................................................... 55

2.7.3 Information-Sharing and Knowledge Transfer ................................................ 59

2.7.4 Reorganization Processes ................................................................................ 62

2.8 Conditions for Trust Development ............................................................................ 66

2.8.1 Mutual Interests and Incentive Structure ......................................................... 66

2.8.2 Time, Interactions and Stability ....................................................................... 68

2.8.3 Organizational Building-Trust Variables ........................................................ 69

2.8.4 Maintenance of the Reputation System ............................................................ 72

2.8.5 Personal Variables ........................................................................................... 74

2.9 Trust and Institutional Uncertainty ........................................................................... 76

2.9.1 General Concept of Trust and Uncertainty ...................................................... 76

2.9.2 Trust and the Institutional Framework ............................................................ 78

2.9.3 Industry-Specific Institutional Frameworks ..................................................... 80

2.9.4 Effects of Uncertainty and Instability on Trust Development .......................... 83

3 The New Economy (NE) .................................................................................................... 89

3.1 Definition .................................................................................................................. 89

3.1.1 Conceptual Origins .......................................................................................... 90

3.1.2 Adopted Perspective ......................................................................................... 92

3.2 A Knowledge-Based Economy ................................................................................. 94

3.2.1 Knowledge and the Production Function ......................................................... 94

3.2.2 The Evolutionary Economics Approach ........................................................... 97

3.2.3 Knowledge in the New Economy ...................................................................... 98

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3.2.4 Characteristics of Knowledge in the New Economy ...................................... 100

3.3 Institutional Inovations ............................................................................................ 104

3.3.1 Institutional Changes ..................................................................................... 104

3.3.2 The New Creative Destruction Process ......................................................... 105

3.3.3 Change in the Relative Prices ........................................................................ 108

3.4 New Economy and Old Economy ........................................................................... 111

3.5 Effects of New Economy Characteristics on Organizations ................................... 121

3.5.1 A New Business Environment ......................................................................... 123

3.5.2 Network-based Organizational Forms ........................................................... 126

3.5.3 A New Work Dynamics ................................................................................... 128

3.6 The New Telecommunications Industry ................................................................. 131

3.6.1 Privatization: ‘Boom and Bust’ ...................................................................... 133

3.6.2 The Competitive Model .................................................................................. 134

3.6.3 Network-Based Organizational Forms .......................................................... 137

3.7 Institutional Uncertainties ....................................................................................... 140

3.7.1 Sources of Uncertainties and Instability ........................................................ 140

3.7.2 Demand Uncertainty ...................................................................................... 142

3.7.3 Technological Uncertainty ............................................................................. 144

3.7.4 Regulation Uncertainty .................................................................................. 146

3.7.5 The Stock Market Bubble Effects ................................................................... 149

3.8 The Work Conditions in the New Economy ........................................................... 150

3.9 The Brazilian Telecommunications Case Study ..................................................... 155

3.9.1 Privatization Process ..................................................................................... 155

3.9.2 The “Painful Modernization” ........................................................................ 156

3.9.3 Employment Conditions ................................................................................. 156

4 Empirical Analysis: Hypotheses and Methods ................................................................. 161

4.1 Condensing Literature into a Basis for Empirical Research ................................... 161

4.2 Main Hypothesis ..................................................................................................... 163

4.3 Secondary Hypotheses ............................................................................................ 164

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4.3.1 Employee Commitment ................................................................................... 165

4.3.2 Employee Turnover Rates .............................................................................. 167

4.4 The Organizations Used for the Study .................................................................... 169

4.4.1 Description of the Organizations Studied ...................................................... 170

4.4.2 Criteria for Classification of the Organizations ............................................ 173

4.5 Validation of the Companies’ Grouping ................................................................. 179

4.5.1 Interviews with Experts .................................................................................. 180

4.5.2 General Profile of Organizations ................................................................... 181

4.5.3 Product Innovation-Diversification Profile ................................................... 184

4.5.4 Planning Process Profile ............................................................................... 185

4.5.5 Human Resource Policy Profile ..................................................................... 187

4.5.6 Market Performance Data Comparison ......................................................... 190

4.5.7 Presentations of Survey Results to Participant Companies ........................... 195

4.6 The Questionnaire Survey ....................................................................................... 196

4.6.1 Construction and Validation of the Questionnaire ........................................ 196

4.6.2 Translation Process ........................................................................................ 199

4.6.3 Pre-Tests for Questionnaire Validation ......................................................... 199

4.6.4 Working Material ........................................................................................... 200

4.6.5 The Questionnaire Distribution and Collection Process ............................... 200

4.6.6 General Procedures Adopted ......................................................................... 201

4.6.7 The Study Sample ........................................................................................... 202

4.6.8 Comment Sheet Analysis ................................................................................ 204

4.6.9 Data Entry and Cleaning Procedures ............................................................ 206

4.6.10 Demographic Distribution of Respondents .................................................. 206

5 Hypotheses Test and Analysis: Trust Thrives Where It is Least Needed ........................ 213

5.1 Validity Checking of the Variable Relationships .................................................... 213

5.2 Hypotheses’ Analytical Framework ........................................................................ 216

5.2.1 Analysis of Main Hypothesis .......................................................................... 218

5.2.2 Analyses of Secondary Hypotheses ................................................................ 220

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5.3 Main Hypothesis Test .............................................................................................. 221

5.3.1 Levels of Trust - Mean Comparison ............................................................... 221

5.3.2 Confirming the Effects of Institutional Uncertainties on Trust Levels .......... 224

5.3.3 Supportive Individual Characteristics Analyses ............................................ 229

5.4 Secondary Hypotheses Test .................................................................................... 234

5.4.1 Test of the Relationship between Trust and Employee Commitment ............. 234

5.4.2 Levels of Employee Commitment ................................................................... 236

5.4.3 Employee Turnover Rates .............................................................................. 240

5.5 Main Theoretical Implications ................................................................................ 243

5.5.1 The Major Influence of Industry-Specific Institutional Frameworks ............. 243

5.5.2 New Economy and Old Economy: Singular Organizational Systems ............ 244

5.5.3 New Economy: Moving towards Transactional Contracts ............................ 247

5.5.4 Validation of Game Theory Application ........................................................ 249

5.5.5 The Paradox ................................................................................................... 249

5.5.6 Trust Properties and Dimensions ................................................................... 250

5.5.7 Trust and Performance ................................................................................... 250

6 Conclusions and Outlook ................................................................................................. 253

6.1 Contributions to Management Studies .................................................................... 256

6.2 Managerial Usage .................................................................................................... 258

List of References ................................................................................................................... 261

Appendix ................................................................................................................................ 287

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List of Tables

Table 2-1: Difference between Coordination Mechanisms .................................................. 32

Table 3-1: Keys to the Old Economy and New Economy .................................................. 112

Table 3-2: Percentual Variation of Work Posts per Industry .............................................. 157

Table 3-3: Employee Turnover Rates X Investment in Training and Development .......... 159

Table 4-1: Classification of the Organizations Studied ...................................................... 176

Table 4-2: General Profile .................................................................................................. 183

Table 4-3: Innovation-Diversification Profile .................................................................... 184

Table 4-4: Planning Process Profile .................................................................................... 186

Table 4-5: Human Resource Policy Data ........................................................................... 189

Table 4-6: Companies’ Market Performance ...................................................................... 194

Table 4-7: Questionnaire Distribution-Collection per Company ....................................... 203

Table 4-8: Frequency of Comment Sheet Records ............................................................. 204

Table 4-9: Demographic Distribution of Respondents ....................................................... 208

Table 4-10: Employment Profile .......................................................................................... 211

Table 5-1: Validity Checking of the Database - Variables Grouping ................................. 214

Table 5-2: Validity Checking of the Database – Age Categories ....................................... 216

Table 5-3: Trust Measures – Trust in Superior ................................................................... 222

Table 5-4: Trust Measures – Trust in a Peer ....................................................................... 223

Table 5-5: Trust Measures – Trust in Work Team ............................................................. 223

Table 5-6: Gender/Age Sub Sample Analysis – Male ........................................................ 231

Table 5-7: Gender/Age Sub Sample Analysis – Female .................................................... 232

Table 5-8: Consistency Checking between Trust and Employee Commitment Variables ... 235

Table 5-9: Correlation Tests between Trust and Employee Commitment Variables ......... 236

Table 5-10: Employee Commitment Variables Comparative Analysis ................................ 238

Table 5-11: Employee Turnover Rates Comparison ............................................................ 240

XXI

List of Figures

Figure 1-1: Study Analysis ..................................................................................................... 05

Figure 1-2: Thesis Frame and Structure ................................................................................. 10

Figure 2-1: Substitute and Complementary Approaches - Trust and/or Monitoring ............. 14

Figure 2-2: Trust Action and Expectation of Trust ................................................................ 18

Figure 2-3: Trust-Expectation as a Subjective Perception of the Trustee’s Motivation ........ 22

Figure 2-4: The Placement of Trust and Risk ........................................................................ 24

Figure 2-5: Cooperation within a Firm as an Infinite Game .................................................. 34

Figure 2-6: Organizational Challenges .................................................................................. 35

Figure 2-7: Trust and Contractual Problems Analyses .......................................................... 40

Figure 2-8: Relationship between Trust and Monitoring in Self-Managing Teams .............. 50

Figure 2-9: Trust Investment Evaluation ............................................................................... 52

Figure 2-10: Managerial Evaluation of Investments on Trust ................................................. 53

Figure 2-11: Trust in the Reorganization Process .................................................................... 63

Figure 2-12: The Role of Trust in the Empowerment Function ............................................... 64

Figure 2-13: Information Category in the Formation of the Expectation of Trust .................. 71

Figure 2-14: The General Framework of the Concept of Trust ............................................... 77

Figure 2-15: Framework Effects and Sources of Risk ............................................................. 79

Figure 2-16: Key forces Affecting Organizational Behavior ................................................... 83

Figure 2-17: Cooperative Games under Uncertainty ............................................................... 84

Figure 3-1: Knowledge Production ...................................................................................... 100

Figure 3-2: Service Sector Growth ...................................................................................... 102

Figure 3-3: Technological Innovations Trajectories ............................................................ 108

Figure 3-4: Data Transmission Costs Fallen ........................................................................ 110

Figure 3-5: Microprocessor Price Trends ............................................................................ 110

Figure 3-6: The basic Relationship between Environment and Types of Organizations ..... 122

Figure 3-7: Product Development Cycle .............................................................................. 124

Figure 3-8: Impact Intensity of the New Economy on Different Industries ........................ 132

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Figure 3-9: The Layer Model of the New Telecommunications Industry ........................... 135

Figure 3-10: Star or Hub and Spoke ...................................................................................... 139

Figure 3-11: Many to Many ................................................................................................... 139

Figure 3-12: Types of Organizational Arrangements in Telecommunications ...................... 140

Figure 3-13: Sources of Institutional Uncertainties in the New Economy ............................ 141

Figure 3-14: Job Variation per Industry ................................................................................. 158

Figure 4-1: The Analysis of the Hypotheses ........................................................................ 164

Figure 4-2: Stock Market Performance Telecom Brazil, Nasdaq and Ibovespa .................. 191

Figure 4-3: Comparative Proxy Telecom Brazil and Ibovespa ............................................ 192

Figure 4-4: Comparative Proxy Telecom Return and S&P 500 Return ............................... 194

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List of Abbreviations

NIE New Institutional Economics

NE New Economy

OE Old Economy

ILO International Labor Organization

OECD Organization for Economic Cooperation and Development

VAS Value Added Services

ICT Information and Communication Technologies

NTC New Telecommunications Company

FOC First Order Condition

NPD New Product Development

PTT Postal, Telegraph and Telephone

List of Variables

L Potential loss, if the trustee is untrustworthy

G Potential gain, if the trustee is trustworthy

p Probability of receiving gain if the trustee is trustworthy

R Returns of the company as a function of the difference between an optimal (very best) return without opportunism

X Absence of behavioral risk

O Inflicted loss due to opportunism

b Dependent variable of the corporate culture which reflects the level of loss due to opportunism

C Cost of the implementation of a ‘trust program’

F Fixed cost for implementing a ‘trust program’

Ei Environmental variable

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Glossary:

Trust – “Trust is the voluntary risk investment in advance, in a relationship involving the abdication of explicit safeguard control mechanisms against opportunistic behaviour, in the expectation that the other party, despite the absence of such safeguards, will not behave op-portunistically.”1 Trust is an expectation or attitude related to a specific behavioural risk situa-tion between two people – A and B (or a group of people), and a specific context X.

Corporate Culture – The implicit contractual part of the corporate constitution as informal conventions that all members of the firm have in common, in the form of a shared set of per-ceptions, rules, values, beliefs and other information. Those elements form an essential part of a corporate set of rules or corporate identity.2

System-Trust – Informal Control Mechanism within hierarchies which might be combined in varying degrees in a complementary relationship with authority and price.3

Self-Enforcing Mechanisms – Implicit institutions that can either not at all or only at pro-hibitive cost be verified and enforced by third parties.4 Self-enforcing institutions operate in the way that “if one party violates the terms (by defecting) the only recourse of the other is to terminate the agreement.”5 For instance, trust is a self-enforcing mechanism inbuilt in the cor-porate culture of the firm.

Risk – The possibility of suffering harm or loss, or a course involving uncertain danger or hazard.6 Risk is defined as a measurable (often financial) effect of uncertainty when it is pos-sible to calculate probabilities.7

Uncertainty – It refers to situations in which many outcomes are possible but the likelihood of each is unknown.8 It is immeasurable with no possibility of assigning probabilities, and it is caused by many factors with unpredictable outcomes.9

Environmental Uncertainty – Exogenous uncertainties produced by the institutional envi-ronment. It can be considered as a lack of predictability in the external changes to the organi-zation emanating from a real and objective external environment. Environmental uncertainty might take many forms, like demand uncertainty, technological uncertainty, competition un-certainty or regulation uncertainty.10

1 Ripperger (1998), p. 45. 2 See Wolff (1996), pp. 97 and 103. 3 See Bradach/Eccles (1989/1998), p. 277. 4 See Wolff (1995), p. 90. 5 See Williamson (1996), p. 122. 6 See Eiteman et al. (2001), p. 56. 7 See Bridgewater (2000), p. 345. 8 See Pindyck/Rubinfeld (2005), p. 154. 9 See Bridgewater (2000), p. 345. 10 See Robertson/Gatignon (1998), pp. 521-525.

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New Economy – The New Economy is defined as a set of institutional innovations, as a new macroeconomic configuration that has as its means and driving force the advancement of in-formation and communication technologies (ICT). In this study the term New Economy is used to define an institutional environment characterized by industrial production more based on knowledge-intensive processes, under which ICT companies operate as producers and pro-viders of ICT products and services.

Old Economy – The Old Economy is defined as the traditional institutional environment where industrial processes are based on intensive capital/labor and scale economies. In this study the term Old Economy is used to define industries which are consumers of ICT goods and services as production capital.

New Telecommunications Industry – A subgroup of the ICT industry which has emerged mostly from worldwide privatization processes occurring in the 80’s and 90’s. They are the main New Economy agents as producers and/or providers of ICT products and services.

Industry-Specific Institutional Framework – In this study the term is used to characterize different institutional arrangements of different industries based on a combination of institu-tional variables, like specific political and legal constraints for a given industry, the state of technology, market dynamics and cultural parameters embedded in the industry. Industry-specific institutional frameworks set different institutional constraints which may change the costs of governance among the different industries.

Information – “Information is data which has been organized and communicated.”11 In this sense, we define information as data which is intelligible to the recipient.12

Knowledge – Knowledge is “a set of organized statements of facts or ideas, presenting a rea-soned judgment or an experimental result, which is transmitted to others through some com-munication medium in some systematic form.”13 In this sense, knowledge is defined as the cumulative stock of information and skills derived from the use of information by the reci-pient.14

Employee Commitment – It is a multidimensional variable related to the level of employees’ identification with an organization and assesses the retention of firm-specific human capital. Employee commitment assesses motives to continue the relationship from an employee’s point of view and provides relevant perspectives for incentive scheme design and evaluation of returns over investments on human capital.

Employee Turnover – It is a variable of organizational performance associated with the compensation system and decisions about contracting new workers and maintaining old

11 Porat (1977), p. 5. 12 See Burton-Jones (1999), p. 5. 13 Bell (1973), p. 175, 14 See Burton-Jones (1999), p. 5.

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workers.15 The associated costs of employee turnover include: recruiting, training and reduced productivity from employing inexperienced personnel. Employee turnover is related to the perspective of employment relationship termination.

15 See Lazear (1998), pp. 169-172.