Overview

Hierarchies are ubiquitous modes of organization, that appear in a great variety of forms and sizes. Modern large corporations are no exception. Corporate hierarchies share a set of common characteristics with hierarchies in other types of organization and consist of a large number of participants with diverse responsibilities, technical expertise, personal traits, and, among other things, their own interests and goals.

Corporate hierarchies perform multiple functions. First of all, a hierarchy is a way of organizing tasks and activities efficiently within a firm. Second, a hierarchy is a system for decision-making and information processing. Last but not the least, a hierarchy is a personnel (human resource) management system, organizing careers as vertical progressions along promotion ladders.

More often than not, these goals are not perfectly aligned and designers of corporate hierarchies must find a compromise among them. Consider, for example, the Peter Principle: a person who performs superbly at a lower rank may not be the best candidate for an upper-ranked job. If promotion to a high-ranked job is used as an incentive device to elicit individual effort, the firm could have to compromise the first goal (to allocate workers to tasks according to their comparative advantage) in order to achieve the second (to maintain incentives among junior workers).

In chapter 1 we focused on internal upgrading versus external procurement to characterize in a simple but effective way the allocation of firms among internal and occupational labor markets.