Employee Selection Practices and Performance Pay

I examine the effectiveness of employee selection practices in resolving the information asymmetry regarding an applicant’s ex ante goal congruence. I find that more extensive use of employee selection practices intended to identify goal congruence is positively associated with future employee performance. Further, I find that the association between employee selection practices and performance is weaker in firms that use performance pay in the initial employment contract. Interestingly, I also find a positive association between employee selection practices and use of performance pay in initial contracts.