Suppose that none of the work performed for a large firm required firmor job-specific skills. Further, assume that all the paperwork costs associated with labor turnover were nil. Even in these extreme circumstances there would still be good reason for the large firm to establish an elaborate governance structure for employees and for the employees to achieve considerable de facto job security.

To direct workers to perform certain tasks and to discourage behavior that impairs performance, the firm requires devices which impose costs on the worker for noncompliance. The ability to impose costs is enhanced by making quitting expensive for the worker. If the worker could simply walk away without cost, any particular punishment (say a suspension or fine) could be ignored; if, however, quitting imposed a substantial loss on the worker, he would be vulnerable to the threat of punishment and thus the deterrents become credible. Further, a high exit cost can be a powerful deterrent in its own right. The firm can use the threat of termination to influence the worker's behavior.

The firm has available a number of devices with which to penalize exit, or what amounts to the same thing, reward continuation. One device is to pay a premium wage (like Ford's five-dollar day), the sacrifice of that premium being a cost of leaving borne by the worker. Note that the premium is not paid “up front”; it is deferred so that the payment is contingent upon the worker's continued satisfactory (from the employer's viewpoint) performance. Deferral enables the firm to enforce the agreement without recourse to the expensive judicial system; if legal enforcement were free, then up-front payment would suffice.