What’s Best for Chains: Centralized or Local Hiring? It Depends

There’s a trend in the marketplace these days to go local. Restaurants and grocery stores are touting locally sourced ingredients while Small Business Saturday (tomorrow, Nov. 25)  offers a local antidote to the mad Christmas shopping rush at the mall. Even clothing and furniture stores are jumping on the bandwagon by highlighting items manufactured within the region. But should the push to go local also extend to hiring retail employees? Or is that task best left to the head office? Wharton accounting professor Carolyn Deller and Harvard business professor Tatiana Sandino find answers in their latest research, which examines whether decentralized hiring results in better employee retention and store performance. The paper is titled “Who Should Select New Employees, the Head Office or the Unit Manager? Consequences of Centralizing Hiring at a Retail Chain.” Deller recently spoke with Knowledge@Wharton about the findings. The podcast is hereAn edited transcript of the conversation follows.

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Knowledge@Wharton: Your paper looks at who should select new retail employees, the head office or the unit manager? Can you talk about this research?

We’re interested in studying this question because a lot of organizations place emphasis on employee selection, and many executives see it as a key mechanism to ensure that the individuals in the organization are aligned with the company’s goals and values. But there’s very little empirical research in this area. Coming at it from a management control perspective, we were interested in looking at how allocating decision rights plays into the employee selection process.

Luckily, we had this great setting where an organization was rolling out this centralized hiring regime in a staggered manner. They had transitioned from the decentralized regime to the new centralized model, and there were control stores that remained decentralized during our sample period.

So, we were able to study not only the main effect of centralized hiring on our outcome variables of interest, but we also felt that it’s unlikely to have a uniform impact in the organization. There’s likely to be circumstances where headquarters would have a hiring advantage over unit managers and circumstances where the local manager would be the best person to hire new employees, maybe because the store is located far from headquarters or it serves a different type of demographic than the rest of the chain.

We studied these two different circumstances to see whether centralized hiring was more or less beneficial, depending on the specific circumstances of each unit.

Knowledge@Wharton: You found some benefits for centralized hiring and some benefits for decentralized. Give us the details.

Deller: Interestingly, we found that there was no main effect of centralized hiring. On average, centralized hiring did not improve the amount of time that employees stayed with the organization, aggregate monthly employee turnover at the store level, or store sales performance.

What we did find was mostly consistent with our predictions in terms of the moderating effect of headquarters’ hiring advantage or the local managers’ unit advantage. Specifically, we found that in busy stores, which we proxied for the sales per labor hour, where it’s likely that the unit manager is really constrained in terms of time available to screen and hire new employees, centralized hiring was beneficial in terms of increasing the average duration that an employee would stay with the organization.

But in circumstances where the local manager may know best who to hire for the local team — how to serve those unit customers, if the store served a different type of market relative to the rest of the chain, or the store was more likely to serve repeat customers — we found that the benefits of centralized hiring did not appear. In fact, centralized hiring could actually be detrimental, relative to decentralized hiring, in terms of the time that employees stay with the organization and employee turnover for the store overall.

Knowledge@Wharton: What is the takeaway from your research? It seems that retail should take a bifurcated approach. Some places would benefit from centralized hiring, and some places would benefit from local hiring.

Deller: Exactly. I would presume that most organizations probably have a uniform policy in terms of who does the hiring. Is it headquarters? Is it the local unit manager? But

our research suggests that the effect of centralized or decentralized hiring could depend very much on the unit’s particular circumstancesClick To Tweet. Retail chains may wish to consider whether that uniform policy is appropriate or whether they should do a mixed model, where some stores do their own hiring while others leave it up to headquarters, particularly busy stores that really can’t do that on their own, to see if they can improve their hiring processes.

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Knowledge@Wharton: In the paper, you point out that decentralized hiring could be beneficial if a store has atypical demographic characteristics. If it’s not like the other stores, it would help more to let the local people hire people locally.

Deller: Yes. A lot of chain organizations franchise some of their units. Prior research has shown that franchising is more common in units that are located farther from headquarters, in units that serve different markets and in organizations where repeat customers are more likely. For those situations, it can be difficult for headquarters to monitor units that are far from headquarters. It can be difficult for headquarters to really understand the nuances of what is needed to serve customers of different demographics.

We were asking, does that apply to the hiring process? You could think that centralized hiring might help employees who maybe feel a bit disconnected from the organization because they’re far away or because they serve a different market. Centralized hiring could be beneficial for those employees to feel like they’re part of the organization. But it seems that the local managers’ informational advantage, in terms of the types of people you need to serve those customers and who would fit in the team, trumps any possible benefits of any centralized hiring.

“I think employee selection and promotion are two very important decisions made by organizations that can have huge costs if you get it wrong.”

Knowledge@Wharton: Are there applications for this research beyond retail chains?

Deller: I think this could apply most directly to retail organizations, but there are many sectors and industries where organizations have multiple units spread across the country or multiple countries. Banking, hospitality chains, even some hospitals. Even more broadly, in large-scale organizations there might be circumstances where managers might know best who fits the demand of different clients served by that business unit. Or there could be cases where that business unit is overly busy, or managers may be disconnected from the overall strategic goals of the organization, so you might want to have experienced HR people in headquarters doing the hiring.

 

Republished with permission from Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania.

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