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vi • Preface

DOES MANAGEMENT MATTER?

A recent study collected data on management practices and performance for a large set of
companies around the world to try to assess whether organizational design was important
for performance. Most of the policies analyzed were the kind discussed in this book, such
as the firm’s emphasis on continuous improvement, the extent to which it hires and retains
the best performers, and the use of targets and incentives.

Does management matter? Their evidence is that it does, significantly. The study found
that good management practices are strongly correlated with higher productivity, better
quality of products and services, and better odds that the firm will survive competition
and grow.

The researchers also found that management practices vary considerably within industries
and countries and across the world. Firms that face stronger competition, including by
competitors exporting from other countries, tend to have good practices. Multinational
firms also tend to have better practices. By contrast, government- and family- owned firms
tend to be less well managed. The fact that significant variation exists in management prac-
tices, even within the same industry in the same country, suggests that there is room for
improvement, especially in emerging markets.

Source: Bloom and van Reenen, 2010

WHAT IS PERSONNEL ECONOMICS?

It may seem odd to apply economics to human resource and general management top-
ics. In fact, it makes perfect sense. Economics is a methodology that has been applied to
many areas of human activity and has had enormous influence on the social sciences.
That methodology is quite flexible and can be applied to many problems involving
human behavior. The ability to apply a consistent methodology allows us to develop
a useful framework for studying organizational design.
Economists recognize two elements that drive human behavior. One is psychology
(preferences). Understanding preferences and their formation and evolution is the realm
of classical psychology. The second is the environment in which people act to attain
their goals. This is the realm of economics which focuses on budgets, prices, constraints,
information, and incentives. It also focuses on social interactions, because an employee’s
colleagues, manager, and customers play important roles in driving behavior.
This distinction between preferences and the environment is recognized in psychol-
ogy. The subfield of social psychology generally focuses on the impact of the environ-
ment on individual behavior—just like economics. The fields of social psychology and
personnel economics study many of the same issues, although from somewhat different
perspectives. This also means that what we often think of as psychology is not, in the
purest sense.
 Lazear f03.tex V2 - September 15, 2014 5:48 P.M. Page vii

What Is Personnel Economics? • vii

Because economics focuses on the effects of the environment on behavior, it gen-

erally starts with only crude assumptions about preferences of individual employees.
This is more of a virtue than it might seem. The more abstract and general the model,
the wider its applicability. Thus, in economics we may assume that employees attempt
to maximize their pay. By pay, we mean not only compensation, but also benefits, job
amenities, work environment, and other things offered by the firm that they might value.
A theory of pay for performance then has relevance for using any motivational tool, not
just cash.
The key part of the economic approach is to focus on how the environmental
variables—information, resources, constraints, decisions, and incentives—affect the
outcome. Those are the issues that are analyzed in this book. More often than not, the
analysis results in a statement of one or more important tradeoffs between benefits and
costs that must be balanced.
Two results of this approach are worth noting here. First, the economic tools that
we employ are used to analyze a variety of problems. This allows us to provide a more
structured approach to the topics covered in this book. By the end of the book, we will
be able to develop a framework for thinking about organizational design as a whole.
Second, economics focuses on variables that managers have a great deal of control
over. The primary factors analyzed in this book are information, decisions, investment,
and incentives. These are exactly the levers that managers tend to have the most ability
to pull to better design their organizations. It is much easier to alter the incentives than
to change the psychology of your workforce.
Recently many firms have begun using “workforce analytics” techniques to analyze
the design and effects of personnel policies such as recruiting, training, feedback, and
performance evaluation. Personnel economists have been doing the same for decades—
practice is finally catching up with the research. Scholars have collected many novel
datasets, drawn from personnel records and intranet systems inside firms, surveys of
employees and employers, matched worker-firm datasets collected by governmental sta-
tistical agencies, and experiments run by companies. Some of the examples we describe
in this book come from just this kind of research, and they illustrate that the concepts,
frameworks, and way of thinking presented in the book are even more practical in the
days of workforce analytics.
It was mentioned earlier that economics and social psychology are different fields
analyzing similar topics (organizational sociology could be added to this group as well).
There is a great deal of healthy dialogue (competitive and cooperative, as it should be)
between economists, social psychologists, and sociologists studying the issues covered
in this textbook. Personnel economics has grown out of this dialogue. It started as a
small subfield of labor economics. It then incorporated new insights from informational
economics to start studying management of employees inside firms. Over time, person-
nel economics became more refined and more successful and started to incorporate
insights, evidence, and topics from social psychology and organizational sociology. (It
can be argued that personnel economics is causing those fields to evolve as well.) Thus,
while our approach and emphasis is economics, this book is more properly thought of
as the result of an active debate between, and mixing of, different social sciences that
study management issues.
 Lazear f03.tex V2 - September 15, 2014 5:48 P.M. Page viii

viii • Preface

Of course, a full understanding of human resource management also requires the

study of psychology and sociology. This text does not pretend to be the final word on
organizational design. Rather, it is a strong complement to more traditional approaches,
as well as a fresh approach for most students and managers.
One final note: economics facilitates a relatively rigorous analysis of organizational
design. Many of the chapters in this book have appendices with more mathematical
discussion of key concepts. The appendices are available online at our Companion site,
http://www.Wiley.com/College/Lazear. We strongly encourage you to study the appen-
dices for each chapter as you work through the book.

WHO IS THIS BOOK FOR?

This book has several natural audiences. Undergraduates would benefit greatly from
studying the book. In fact, we believe that in most cases, they will benefit more by taking
a course using this book than they would by taking a traditional labor economics course.
Not only will they learn and apply ideas from microeconomics, such as incentive theory,
but they will learn principles that will be valuable in their careers.
We both teach MBA students and write this book from that perspective. It provides
a way to think about overall organizational design, as well as specific human resource
policies. Because MBAs tend to become consultants, general managers, or run organi-
zations themselves, the issues and approach used here are extremely relevant for such
students. Executive MBA students should also find the book useful. It will provide them
with rigorous frameworks to better understand and use their well-earned experience
and common sense to make it even more powerful and effective.
Although the focus of the book is on personnel policies and organizational design,
it is not written for a human resource specialist. Specialist texts focus on detailed exam-
ination of how to implement personnel policies, such as design of a pension plan or a
performance appraisal form. Nevertheless, the text should be extremely valuable to an
HR specialist, because it provides a strategic and analytical overview for human resource
policies. It provides the broader perspective that is necessary before focusing on the
details. For similar reasons, the sophisticated general manager who seeks a rigorous and
practical understanding of HR and organizational design may find this book to be a
more challenging read than most business books, but also of far more substance.

FURTHER READING
Abrahamson, Eric. 1996. Management fashion. Academy of Management Review 21(1):254–285.
Becker, Gary. 1976. The Economic Approach to Human Behavior. Chicago: University of Chicago
Press.
Bloom, Nicholas, and John Van Reenen. 2010. Why do management practices differ across coun-
tries? Journal of Economic Perspectives 24(1):203–224.
Brown, Roger. 1986. Social Psychology. New York: Free Press.
Lazear, Edward. 1995. Personnel Economics. Cambridge, MA: MIT Press.
 Lazear f04.tex V2 - September 15, 2014 5:48 P.M. Page ix

ACKNOWLEDGMENTS

T his book is based on our research and that of many others. We are indebted to
all researchers in this vibrant area of economics. Several colleagues have been especially
influential to our thinking over the years. These include George Baker, Gary Becker,
Michael Beer, Richard Hackman, Bengt Holmstrom, Kathryn Ierulli, Michael Jensen,
Kenneth Judd, Eugene Kandel, David Kreps, Kevin Murphy, Kevin J. Murphy, Paul
Oyer, Canice Prendergast, Melvin Reder, John Roberts, Sherwin Rosen, Kathryn Shaw,
and Robert Topel.
Many colleagues tested out drafts of this book with their students, for which we
are grateful. We received very helpful comments and suggestions on this and the
previous edition from Steve Bronars, Jed DeVaro, Tor Eriksson, Charles Fay, Kathleen
Fitzgerald, Mark Frascatore, Maia Guell, Joseph Guzman, Wally Hendricks, Mario
Macis, Marie Mora, Tim Perri, Erik de Regt, Valerie Smeets, Frederic Warzynski,
Niels Westergard-Nielsen, and Cindy Zoghi (who also kindly provided the data for
Figure 3.1).
We received substantial help and inspiration from our students who used various
drafts at the University of Chicago, Stanford, Aarhus University, and the Fondation
Nationale des Sciences Politiques (Sciences-Po).
Finally, we are grateful to our assistants John Burrows, Thomas Chevrier, Nadav
Klein, Maxim Mironov, Yi Rong, Yoad Shefi, Marie Tomarelli, and Olena Verbenko,
who gave thoughtful input on the text.

ix
 CONTENTS
ABOUT THE AUTHORS iii
PREFACE v
ACKNOWLEDGMENTS ix

PART ONE SORTING AND INVESTING IN EMPLOYEES 1

CHAPTER 1 SETTING HIRING STANDARDS 3
An Example: Hiring Risky Workers 3
New Hires as Options 3
Analysis 5
A Counterargument 7
Setting Hiring Standards 9
Balancing Benefits Against Costs 9
Foreign Competition 11
The Method of Production 12
How Many Workers to Hire? 15
Other Factors 16
Making Decisions with Imperfect Information 17
Make a Decision Independent of Analysis 17
Estimate the Relevant Information 17
Summary 19
Study Questions 20
References 21
Further Reading 21
Appendix (available online)

CHAPTER 2 RECRUITMENT 22
Screening Job Applicants 24
Credentials 25
Learning a Worker’s Productivity 26
For Whom Is Screening Profitable? 28
Probation 30
Signaling 32
Who Pays and Who Benefits? 35
Examples 35

x
 Contents • xi

Signaling More Formally: Separating

and Pooling Equilibria 36
Which Type of Firm Is More Likely
to Use Signaling? 38
Summary 38
Study Questions 40
References 40
Further Reading 41
Appendix (available online)

CHAPTER 3 INVESTMENT IN SKILLS 42

Matching 44
Investments in Education 45
Effects of Costs and Benefits 47
Was Benjamin Franklin Correct? 49
Investments in On-the-Job Training 51
General versus Firm-Specific Human Capital 54
Who Should Pay for Training? 56
Implications of On-the-Job Training 61
Rent Sharing and Compensation 63
Summary 66
Study Questions 67
References 68
Further Reading 68
Appendix (available online)

CHAPTER 4 MANAGING TURNOVER 69

Is Turnover Good or Bad? 69
Importance of Sorting 70
Technical Change 70
Organizational Change 71
Hierarchical Structure 71
Specific Human Capital 71
Retention Strategies 72
Reducing Costs of Losing Key Employees 73
Embracing Turnover 75
Bidding for Employees 76
Raiding Other Firms: Benefits and Pitfalls 76
Offer Matching 80
Layoffs and Buyouts 82
Who to Target for Layoffs 83
Buyouts 86
Summary 90
Study Questions 91
xii • Contents

References 91
Further Reading 92
Appendix (available online)

PART TWO ORGANIZATIONAL AND JOB DESIGN 93

CHAPTER 5 DECISION MAKING 95
The Organization of an Economy 95
Markets as Information Systems 96
Markets as Incentive Systems 98
Markets and Innovation 98
Benefits of Central Planning 98
The Market as Metaphor for Organizational Design 100
Benefits of Centralization 102
Economies of Scale or Public Goods 102
Better Use of Central Knowledge 103
Coordination 103
Control 104
Benefits of Decentralization 105
Specific versus General Knowledge 105
Other Benefits of Decentralization 107
Decision Management and Control 108
Decision Making as a Multistage Process 108
Creativity versus Control 110
Investing in Better-Quality Decision Making 118
Summary 121
Study Questions 123
References 123
Further Reading 124
Appendix (available online)

CHAPTER 6 ORGANIZATIONAL STRUCTURE 125

Types of Organizational Structures 126
Hierarchy 126
Functional Structure 128
Divisional Structure 129
Matrix or Project Structure 133
Network Structure 136
Which Structure Should a Firm Use? 139
Coordination 140
Two Types of Coordination Problems 140
Coordination Mechanisms 142
 Contents • xiii

Implementation 145
Span of Control and Number of Levels in a Hierarchy 145
Skills, Pay, and Structure 148
Evolution of a Firm’s Structure 149
Summary 150
Study Questions 152
References 153
Further Reading 154

CHAPTER 7 JOB DESIGN 155

Patterns of Job Design 155
Optimal Job Design: Skills, Tasks, and Decisions 159
Multiskilling and Multitasking 159
Decisions 163
Complementarity and Job Design 164
When to Use Different Job Designs 165
Taylorism 166
Factors Pushing Toward Taylorism or Continuous
Improvement 168
Intrinsic Motivation 171
Summary 173
Study Questions 175
References 176
Further Reading 177
Appendix (available online)

CHAPTER 8 ADVANCED JOB DESIGN 178

Teams 179
Group Decision Making 179
Free Rider Effects 179
When to Use Teams 180
Other Benefits of Team Production 181
Implementation of Teams 186
Team Composition 187
Effects of Information Technology 190
Effects on Organizational Structure 190
Effects on Job Design 193
High-Reliability Organizations 196
Summary 198
Study Questions 199
References 200
Further Reading 200
Appendix (available online)
xiv • Contents

PART THREE PAYING FOR PERFORMANCE 201

CHAPTER 9 PERFORMANCE EVALUATION 207
Purposes of Performance Evaluation 208
Ways to Evaluate Performance 208
Quantitative Performance Measurement 208
Risk Profile 209
Distortion 210
Manipulation 214
Match of the Performance Measure to Job Design 215
Subjective Evaluation 218
Why Use Subjective Evaluations? 219
Reduce Distortion and Manipulation 220
Practical Considerations 222
Summary 227
Study Questions 228
References 229
Further Reading 229

CHAPTER 10 REWARDING PERFORMANCE 230

How Strong Should Incentives Be? 233
Intuition 233
Imperfect Evaluations and Optimal Incentives 237
Summary: How Strong Should Incentives Be? 242
Paying for Performance: Common Examples 243
Rewards or Penalties? 243
Lump Sums, Demotions, or Promotions 246
Caps on Rewards 249
Applications 251
Profit Sharing and ESOPs 251
Organizational Form and Contracting 253
Motivating Creativity 254
Summary 255
Study Questions 256
References 257
Further Reading 257
Appendix (available online)

CHAPTER 11 CAREER-BASED INCENTIVES 258

Promotions and Incentives 261
Should Promotions Be Used as an Incentive System? 261
Promotion Rule: Tournament or Standard? 262
 Contents • xv

How Do Promotions Generate Incentives? 267

Advanced Issues 271
Evidence 275
Career Concerns 276
Seniority Pay and Incentives 276
Practical Considerations 278
Summary 279
Study Questions 281
References 282
Further Reading 282
Appendix (available online)

CHAPTER 12 OPTIONS AND EXECUTIVE PAY 284

Employee Stock Options 285
Stock Options–A Brief Overview 285
Should Firms Grant Employees Options? 286
Options as Incentive Pay 288
Executive Pay 293
What Is the Most Important Question? 293
Executive Pay for Performance 295
Other Incentives and Controls 297
Do Executive Incentives Matter? 299
Summary 302
Employee Stock Options 302
Executive Pay 303
Study Questions 303
References 304
Further Reading 304
Appendix (available online)

PART FOUR APPLICATIONS 307

CHAPTER 13 BENEFITS 309
Wages versus Benefits 309
Why Offer Benefits? 312
Cost Advantage 312
Value Advantage 313
Government Mandate 315
Implementation of Benefits 316
Improving Employee Sorting 316
Cafeteria Plans 317
Pensions 319
Paid Time Off 327
Summary 329
xvi • Contents

Study Questions 331

References 331
Further Reading 332

CHAPTER 14 ENTREPRENEURSHIP AND INTRAPRENEURSHIP 333

Entrepreneurship 334
The Choice to Become an Entrepreneur 335
Intrapreneurship 344
Internal Markets 345
Creativity versus Control 347
Recruiting 347
Motivating Creativity 348
Speed of Decision Making 350
Reducing Bureaucracy 350
Continuous Improvement 351
Summary 353
Study Questions 353
References 354
Further Reading 355
Appendix (available online)

CHAPTER 15 THE EMPLOYMENT RELATIONSHIP 356

Employment as an Economic Transaction 356
Perfect Competition 356
Imperfect Competition 357
Complex Contracting 358
Summary 361
Communication between Management and Workers 362
Communication from Management to Workers 362
Communication from Workers to Management 364
The Optimal Level of Worker Consultation 366
Improving Cooperation 370
From the Prisoner’s Dilemma to Employment 372
Reputation and the Employment Relationship 374
Investing in Reputation 375
Summary 381
Personnel Economics in Practice 381
Study Questions 383
References 383
Further Reading 384
Appendix (available online)
GLOSSARY 385
INDEX 393
 Lazear p01.tex V2 - September 15, 2014 5:48 P.M. Page 1

Part One
SORTING AND INVESTING
IN EMPLOYEES

T he textbook has three core sections, followed by a shorter section with appli-
cations and advanced summary discussions. In this first section, we take a simple view
of employees that is quite similar to that taken in much of biology: nature versus nur-
ture. In our context, employees bring to the workplace certain innate abilities, such as
to think quickly or creatively or to work with numbers. They also develop new or more
advanced skills through education, experience, and on-the-job training.
The topics of this section are how to sort employees by their innate or accumu-
lated skills, how to invest further in their skills, and how to manage their exit from the
organization, as a function of their talents and skills. One can think of a firm’s career
policies as a kind of pipeline, bringing employees in, developing and promoting them,
and eventually transitioning them out. That is the sequence of this section.
In the process of exploring these issues, several important economic concepts are
introduced: asymmetric information, investment, labor market constraints on firm poli-
cies, and different methods of contracting.
Asymmetric information refers to situations where two parties to an economic trans-
action (in our case, the firm and the employee) have different information that is relevant
to the transaction. Problems of asymmetric information are ubiquitous in economies
and organizations (e.g., the quality of a new hire or the effort that an employee expends
on the job). They also tend to lead to inefficiencies, because incorrect decisions are
made, because lack of information creates risk, or because one party exploits its infor-
mational advantage for personal gain at the expense of overall efficiency.
Asymmetric information arises in recruiting because the employee has more infor-
mation about suitability for a job than does the firm (the opposite case may also arise).
This presents a challenge for firms and employees during recruiting. We will see that
one way to deal with this is to use the economic principle of signaling, which encourages

1
 Lazear p01.tex V2 - September 15, 2014 5:48 P.M. Page 2

2 • Sorting and Investing in Employees

the employee to use his or her information in a constructive rather than strategic way.
The idea of signaling has applications in many areas of business, and we shall mention a
few. This is an example of how the tools used in this book have broad application outside
of employment.
The second economic tool used is the idea of optimal investment. Employees and
their employers can invest in their skills. In studying this issue, we use ideas that also
play a role in finance courses. We will also consider the constraints that labor markets
impose on human resource policies in firms—for example, whether a firm should invest
in employee skills.
Finally, we will see three approaches to thinking about economic transactions or
contracts. We start with the simplest—a spot market whereby the firm simply pays an
employee’s market price at each point in time. This is the standard view in introduc-
tory microeconomics classes. But in trying to improve recruiting, we will see the need
for more complex, multiperiod contracts between the firm and the employee. These con-
tracts will also be contingent, in this case on employee performance. Finally, in some cases
we will see that the contract between the firm and the employee involves implicit or infor-
mal elements, because it is not always possible to write complete formal contracts. This
gives us a useful framework for thinking about the overall employment relationship and
even issues such as corporate culture.
 Lazear c01.tex V2 - September 15, 2014 5:41 P.M. Page 3

1
SETTING HIRING
STANDARDS

When you’re around someone good, your own standards are raised.
—Ritchie Blackmore, 1973

I n this chapter our goal is twofold: to introduce the topic of recruitment and to
introduce the economic approach used in the textbook. Let’s ease into both by
considering an example.

AN EXAMPLE: HIRING RISKY WORKERS

New Hires as Options
Imagine that you are a partner in an investment bank in the City (financial district) in
London and are deciding between two candidates to fill a position as an associate (junior)
investment banker. Gupta has the standard background of most of the applicants that
you see, including a degree in economics, a few years of experience as a financial analyst,
an MBA with a focus in finance, and a summer internship at an investment bank. You
feel that his productivity is highly predictable, and that he can produce £200,000 of
value per year. Svensen, however, has a very unusual background compared to other
applicants. She has a strong track record and appears quite talented, but does not have
much experience related to investment banking. Thus, you feel that her success is much
less predictable. She may turn out to be a star, in which case she will produce £500,000
per year, but she may also turn out to be a disaster, actually losing £100,000 per year.
Suppose that each of these outcomes for Svensen is equally likely (50 percent odds).
Then expected (average) output from Svensen in any given year is exactly the same as the
output from Gupta:

Expected output from Svensen = ½ ⋅ £500,000 − ½ ⋅ £100,000 = £200,000.

3
 Lazear c01.tex V2 - September 15, 2014 5:41 P.M. Page 4

4 • Setting Hiring Standards

FIGURE 1.1
HIRING A RISKY OR PREDICTABLE WORKER
Net = £1 M

Gupta
Retain
Net = £4 M

Svensen Expected net = £1.9 M

Fire after 1st year
Net = –£200 K

If the cost (wages and benefits) of both employees is the same, which is the better
hire? The answer might seem counterintuitive, but often the firm should hire the riskier
worker.
Suppose that both Svensen and Gupta can be expected to work at your firm for
10 years. Suppose further that it takes one full year to determine whether Svensen is a
star. The salary is £100,000 a year, and for the moment let us assume that this will be
the salary for the foreseeable future.1 In that case, your firm earns a profit of £100,000
per year from Gupta, for a total value of £1 million over 10 years. The top branch of
Figure 1.1 shows this choice.
Alternatively, you can hire Svensen. With probability equal to ½ that Svensen is a
star, producing £500,000 per year, your firm earns profits of £400,000 from employing
her for 10 years, netting £4 million. With probability equal to ½ that Svensen loses
money for your firm, you can terminate her at the end of the year, so the total loss
is £200,000, including her salary. These two outcomes are the remaining branches in
Figure 1.1. Thus, the expected profit from hiring Svensen is:

Expected profit from Svensen = ½ ⋅ £4,000,000 − ½ ⋅ £200,000 = £1,900,000.

Svensen is therefore almost twice as profitable to hire as Gupta! Even though the
two candidates have the same expected value, Svensen is worth much more. The firm
can keep her if she turns out to be a good employee and dismiss her if she turns out to
be a bad one. The firm has the option of firing poor workers and keeping the good ones.
This is the argument that is sometimes made for hiring workers with potential over
conservative, proven ones. With the more proven worker, the firm gets a solid per-
former. With the risky worker, the firm may find that it made a mistake, but this can be
remedied relatively quickly. It may also find that it has a diamond in the rough. In such
a situation, it may make sense for the firm to lower (or broaden) recruiting standards and
consider some less conventional candidates.

1 In this example, we ignore issues of present value by assuming that the interest rate is zero to keep things

simple. When we do this in examples in this book, it is always the case that the intuition that is developed would
be identical if we used discounted present values. Similarly, all examples in this text use inflation-adjusted
figures, since inflation does not affect the conclusions.
 Lazear c01.tex V2 - September 15, 2014 5:41 P.M. Page 5

An Example: Hiring Risky Workers • 5

This simple example can be quite surprising to many students, since it seems to
contradict the intuition that, if expected values are equal, risk is always a bad thing.
However, risk is not a bad thing in the case of real options such as hiring employees.
It is a nice example because it illustrates how formal economic analysis can lead to better
decisions. Our intuition tends to be the opposite of the correct answer in this case.

Analysis
The structure developed here suggests several other factors that are important in decid-
ing whether to take a chance on a risky hire.

Downside Risk
The value of taking a chance on a risky candidate can be so large that it is often the better
strategy even if the safe worker has a higher expected value per year. Even if Svensen
might have been a total disaster, destroying £1,000,000 of value with a probability of
½, it would have paid to take a chance on her. However, the more the potential there is
for an employee to destroy value, the less likely is it to be optimal to take a chance on a
risky worker.

Upside Potential
Svensen was potentially valuable because she could generate high profits if she turned
out to be a star. The greater those profits, the greater the option value from a risky hire.
Thus, in jobs where small increases in talent lead to large increases in value creation,
hiring risky candidates will be even more valuable (as long as there is no increased down-
side risk as well). Think of an entrepreneur assembling a new management team. There
is little to lose, but there may well be much to gain. In such a case, it will make more
sense to take a chance on a risky candidate.
Our analysis applies better to job applicants with more uncertainty about their
potential performance. Little is known about a recent graduate with a short resume,
but someone who has 20 years of experience may have more predictable performance.
Firms might take more chances on new labor market entrants. Similarly, a job applicant
who is changing occupations may be worth considering.
Finally, firms should consider the upside potential of the specific candidate. An
applicant with an unusual background, but with evidence of adaptability to different sit-
uations, creativity, and strong abilities, may be a good person to consider for a risky hire.

Termination Costs
The more costly it is to fire a worker, the more costly is a risky candidate. Nevertheless,
it may still pay to hire the risky worker and terminate in the case that the worker does not
turn out to be a good fit, even if there are high termination costs. In most countries, firms
are prevented from terminating workers at will. Legal or social restrictions can make the
option of firing a worker after one year costly. Consider the extreme case where hiring
is for life. If the firm is risk neutral (is willing to accept any risks, as long as expected
values are equal), as long as Svensen’s expected productivity is equal to or greater than
Gupta’s, it will be a profitable bet to hire Svensen. More generally, the benefits from the
 Lazear c01.tex V2 - September 15, 2014 5:41 P.M. Page 6

6 • Setting Hiring Standards

case where Svensen turns out to be a star are so high that it would often be worth hiring
Svensen even if firing costs were high.

Risk Aversion
If the firm is risk averse, it may still be optimal to hire Svensen. Svensen will now be
costly to the firm in a different way, because she is risky. However, the differences in
expected productivity are quite large and should more than compensate for typical levels
of risk aversion.

AN IMPLEMENTATION PROBLEM

The issue of risk aversion raises an interesting point. When managers and recruiting spe-
cialists are taught this example, their typical response is to reject its conclusions, saying that
they would be more conservative in hiring. Why is this the case? Is the theory wrong or
are the managers wrong? Quite possibly, neither. Rather, the analysis assumes that the firm
is relatively risk neutral. However, decision makers are typically risk averse, and this will
affect their decisions. For example, they might expect that they will be criticized or receive
a poor evaluation if they hire a bad candidate for the job. The more risk averse they are,
the more they will make decisions to avoid such an outcome.

To the extent that a manager’s risk aversion is different from that of the employer, this
is an incentive problem or a conflict of interest. This is a topic that we will address in
Chapters 9–12. In the meantime, if those who make hiring decisions are too conservative,
a possible solution to the problem would be to try to avoid punishing them when they
make mistakes in hiring. Another would be to appoint less conservative managers to
handle recruitment.

Length of Evaluation
The time that it takes to evaluate whether Svensen is a star or a disaster affects the value
of hiring a risky candidate. If the evaluation takes 10 years, in our example there is no
value to hiring Svensen. If the evaluation takes only one year, the firm can limit its cost
of a disastrous hire to only one year of pay and poor productivity.

Length of Employment
The value of hiring Svensen would have been even greater if the firm could have
employed Svensen for more than 10 years. For example, if Svensen was 30 years
old when hired and stayed at your company (for the same salary) until retirement,
the profit from hiring Svensen would be £14 million if she turned out to be a star
(£400,000 per year × 35 years). This suggests that the value of a risky hire will usually
be larger the younger the new hire and the lower the turnover in the company (so that
employees tend to stay with the firm longer).
 Lazear c01.tex V2 - September 15, 2014 5:41 P.M. Page 7

An Example: Hiring Risky Workers • 7

A Counterargument
Our conclusions are only as good as the assumptions behind them. An important
element of the economic approach to personnel is careful consideration of when the
assumptions do or do not apply and of what the effect would be of changing key assump-
tions. In the model above, the conclusion rested primarily on one key assumption: that
we can profit when we find a star employee. Let us reconsider this assumption.
If Svensen turns out to be a star, is it safe to assume that we can continue to pay her
£100,000? Might she try to bargain for a better salary? Might other employers try to hire
her away from us? What would happen to our argument if these considerations applied?
These questions bring up a crucial consideration throughout this book: The firm
always has to match an employee’s outside market value. More precisely, the firm offers
a job package with many characteristics, including the type of work, extent of effort
required to do the work, degree of training, pay and other benefits, possibility for further
advancement, and job security. The employee will consider all elements of the package
in valuing the job and compare it to alternative jobs offered by competing employers.
Firms must make sure that their job offers match those of competing employers in terms
of pay and other characteristics.
For now, let us keep things simple and focus on pay and productivity. Suppose
that other employers can observe how productive Svensen is. Moreover, assume that
Svensen’s productivity as a star or a disaster would be the same at any other investment
bank. These are reasonable starting assumptions for investment banking; the work is
often quite public and is similar at most firms.
When this is the case, if Svensen is revealed to be a star, other investment banks will
be willing to pay her more than £100,000 per year. In fact, they should be willing to pay
as much as £500,000 per year, since that is her productivity. Labor market competition
will tend to drive competing employers toward zero profit from hiring Svensen.
If Svensen is a disaster, no investment bank should be willing to hire her. She is
likely to find better employment in a different industry where her productivity is not
negative.
What is the benefit to your firm of hiring Svensen in this case? There is none. In
order to retain her if she is a star, you have to compete with other firms and would end
up paying about £500,000 per year. In other words, our conclusion that it would pay to
hire a risky candidate rested on our ability to earn a profit from Svensen if she turned
out to be a star.
How can we benefit from Svensen? There are two possibilities.

Asymmetric Information
Competing firms may not figure out Svensen’s productivity, at least not immediately.
Even though investment banking is often quite public work, some of it is not, and the
work is also generally done in teams. Outside firms may find it difficult to estimate
Svensen’s individual contribution because of these factors. This implies that in indus-
tries where productivity is less individualistic and less public, hiring a risky candidate
is more likely to be worthwhile. Furthermore, to the extent that your firm can delay
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from the rowlocks, and out of the men's hands; they must give it up
for this time.
All their thoughts are for the poor shipwrecked crew, and the bitter—
bitter disappointment they must feel. Again they cheer to them, and
shout to them, to keep their hearts up—they will soon be at them
again; and they make the best of their way back to the steamer.
They have failed in their first attempt.
The steamer again tows them into position, and they make for the
second time boldly in for the wreck; the coxswain steers as near to
the stern as possible, avoiding the danger of being washed over it
on to the deck of the vessel, and thus crushed to pieces; they get
nearer to the vessel than they did before; the shipwrecked crew
begin to stir themselves, the boatmen are about to run the boat
alongside, when again they are overwhelmed in the rush of a fearful
sea, buried in its deluge of broken water, and the boat is again
hurled away by the force of the waves, and carried many fathoms
from the vessel; the anchor holds, but the tide is running more
strongly than ever, and in the direction to carry them right away
from the wreck; and so it is hopeless for them to try to get any
nearer to her from where they are.
The tide has risen and is nearly at its height; the vessel has fallen
still more over upon her side; the lee side of the deck is completely
under water, the top of the deck-house is just above the sea; the
crew have been driven from their old place of shelter, they have
lashed a spar across the mizen shrouds, and are all clinging to it,
while the heavy waves beat continually over the poor fellows.
It is with terrible agony that the crew on board the wreck witness
the second failure of the life-boat: "She will never come again," the
captain says, in a voice of despair; "the men cannot do it, the very
life must have been washed and beaten out of them." Great is their
astonishment to find that no sooner does the life-boat clear herself
of the water that seems almost to drown her, no sooner do the men
free themselves from the rush of the foam, which has for a time
overwhelmed them, than they begin to cheer again, as if only
rendered the more determined by their second defeat; the more
courageous by the difficulties and dangers they had already
endured; and the shipwrecked crew, encouraged by the hoarse
cheers of the exhausted half-drowned boatmen, do not lose all hope.
The boat is again towed into position, and for the third time makes
in for the wreck.
This time they throw the anchor overboard farther from the vessel
than before, give longer scope to the cable, sail in well under the
ship's stern, and again steer as near as possible to the vessel's lee-
quarter, and lower the foresail.
They are within a dozen yards of the ship; the bowman heaves a
rope with all his force; it falls short of the men in the shrouds to
whom he throws it, and the boat sweeps on; they check her with the
cable, and bring her head to the ship abreast of her, but unhappily
some distance off.
The captain of the shipwrecked vessel had despaired of the boat
being able to come in the third time; but when he saw her coming,
he felt fully convinced that it was their last opportunity of being
saved, and determined that if the boat were again swept from the
wreck, that he would jump into the sea and try and swim to her.
The boat comes and misses, and the crew of the boat see the
captain hastily throw off his sea-boots, seize a life-buoy, and prepare
to plunge into the sea: they shout to him not to do so, and to the
crew to hold him back. "The tide in its set off the Sands would
sweep him away; the seas would beat his life out of him: they will
be back again soon, and won't go home without them."
The steamer has followed the boat as closely as possible, running
down close to the edge of the Sands, just clear of the broken water.
The life-boat has swung out to the full length of her cable, and is in
deep water; the men upon being beaten away from the wreck for
the third time, look round for the steamer, and to their astonishment
see her making in straight towards them.
The men on board the steamer had watched with increasing anxiety
and dismay the defeat of the successive gallant attempts made by
the life-boat crew. They had grown more and more excited each
time that the life-boat had returned to them, and feel now prepared
to run almost any risk whatever to further help the life-boatmen in
their brave but as yet unsuccessful efforts to save the crew.
And so the steamer makes right in across the broken water, straight
for the life-boat; a rope is thrown from the steamer, and is made fast
in the life-boat; they now hope, with the steamer's help, to be able
to sheer the boat right in upon the wreck.
The boatmen have hold of their own cable, to which their anchor is
fast; they gradually draw in upon this cable, and the steamer tries to
tow the boat nearer and nearer to the vessel, and for the fourth time
the life-boat makes in 'mid the wild raging seas for the rescue of the
crew.
The steamer ventures into the rage of the sea, and her position
becomes one of very great peril; she rolls in the trough of the
tremendous waves till her gunwales are right under water; the foam
and spray dash completely over her, and tons and tons of water
deluge her deck. They gradually approach the vessel; the life-boat
sheers in; the seas and tide and wind catch her in their full power,
and whirl her away again.
A huge wave sweeps bodily over the steamer—she is in extreme
danger; the life-boatmen watch her in the greatest alarm, fearing
each moment that a wave will swamp her—but rolling, plunging,
burying herself in the foaming seas, the steamer bravely holds her
own, until to remain longer is certain death to all on board; and
sorrowfully the crew of the steamer abandon their most gallant
attempt, and make out of the rage of broken water.
The life-boatmen rejoice to see the steamer get clear of the deadly
peril, but they are scarcely in less peril themselves; they cut the
steamer's tow-rope, and then find that they must cut their own
cable, to avoid being dashed over the wreck; and away they go
again driven on before the gale. They look at each other, but only
read courage and determination in each other's countenances.
Beaten off for the fourth time, not one heart fails, not one speaks of
giving up the attempt, not one of the brave fellows has any such
thought for an instant; their one consideration is what next shall be
attempted to save the poor fellows from a speedy and terrible death,
which indeed threatens them every minute. Thus the only question
is, what they shall try next? and weak and exhausted, and almost
frozen with cold, but determined, and full of courage and zeal as
ever, their one anxiety is for the poor shipwrecked crew, whose peril
increases each minute, and they prepare for a fifth effort for their
rescue, strong still in their old determination—"that they will not go
home without them."
 CHAPTER XXVI.
SAVED AT LAST.
VICTORY OR DEATH.

"'Tis done—despite the winds—the roll

Of that storm-maddened fearful sea;
Bravery hath snatched each shivering soul,
O greedy death! from thee.
Then the rough seamen's hands they wring,
And some, o'erpowered by bursting feeling,
Their arms around them wildly fling,
While tears down many a cheek are stealing;
They bless them for their noble deed,
True saviours sent in hour of need."
N. Michell.

The ship's hull has now been for some time under water, and it is
evident that the wreck is breaking up fast. She has coals and iron on
board; this dead weight keeps her steady on the Sands, and
prevents the waves lifting her and crashing her down, or she would
long since have been torn and broken to fragments. As it is, the
decks have burst, and the lighter portions of her cargo are being
rapidly washed out of her; the sea in some places is black with coal-
dust, and much wreckage, pieces of her deck and forecastle are
being swept away by the tide.
Each time that the men on board the steamer and life-boat look at
the vessel, count the crew still in the rigging, and find that not any
are missing, they think it indeed a wondrous mercy that all should
still be safe, and get each moment more impressed with feelings of
deep sympathy for the poor fellows, and with the greater eagerness
to dare all to save them.
Daniel Reading, the brave, skilful, and long-tried master of the
steamer, is ill on shore, and so she is in charge of John Simpson, the
mate; he and William Wharrier, the engineer, consult as to the
possibility of making another effort with the steamer, for the tide is
setting off the Sands with such force that they do not see how it is
possible for the life-boat to get in to the wreck and save the crew,
and they find that all the men on board the steamer are perfectly
prepared to second them in any effort that they decide upon
making.
They get the mortar-apparatus ready, and again urge the steamer
through the seas in the direction of the wreck; they hope to get near
enough to the vessel to fire a line from the mortar into the rigging,
to which the shipwrecked crew will attach a rope, and then hauling
this rope on board the steamer, they will take it to the life-boat's
men, who will by it be able to haul the boat through the seas to the
wreck. Cautiously the steamer approaches; the tide has been for
some time rising fast; the steamer does not draw much water; they
are almost within firing distance; the waves come rushing along and
nearly overrun the steamer; at last a breaker larger than the rest
catches her, lifts her high upon its crest, and letting her fall down
into its trough as down the side of a wall, she strikes the Sands
heavily; the engines are instantly reversed, she lifts with the next
wave, and being a very quick and handy boat, at once moves astern
before she can thump again, and they are saved from shipwreck;
and thus the fifth effort to save the shipwrecked crew fails.
No time is lost; at once the steamer heads for the life-boat, and
makes ready to tow her into position. Again not a word—scarcely a
thought—about past failures, only eagerness to commence without
delay a fresh attempt; the steamer is alongside the life-boat.
"Look out, my men, here is another rope for you." "All right!" the
boatmen answer as they catch the line, and haul the hawser into the
boat.
"All right! tow us well to windward, give us a good position, plenty of
room, we must have them this time. All fast! away you go, hurrah!"
The men watch the wreck as they are towed past her. "Oh! the poor
fellows! to think we have not got them yet. Well, we have had a
hard struggle for it, but, please God, we will save them yet—we will
save them yet!"
"Ah! look how that wave buries them all; there they are again, let us
give them a cheer, it will help them to keep their hearts up." And as
the boat rose upon a sea, they shouted and waved to the
shipwrecked crew.
"There, another breaker has gone right over her; how she heaves
and works to it! Yes, and do you see how her masts are swinging
about, and in different directions? they are getting unstepped and
loose; she is breaking up fast, working all over—all of a quiver and
tremble! Poor fellows! poor fellows! we have not a moment to spare.
It must soon be all over, one way or the other!" Thus the men speak
to each other; they are in a glow of eagerness and excitement, and
can scarcely restrain themselves to get quietly to work. For as they
watch the poor fellows, and time after time see the waves wash over
them in quick succession—and as each wave passes, see them still
clinging on—they almost feel as if they could jump at them to try
and save them, and in their noble and gallant sympathy and
determination lose all sense of weakness, and cold, and exhaustion.
When describing their feelings, one of the men said, "We were
thoroughly warm at our work, and felt like lions, as if nothing could
stop us."
It is in this spirit that they now consult together, as to the plan upon
which they shall make their next effort. First one scheme is
suggested, and then another, but these seem to give no better
prospect of success than those that have been already tried in vain.
At last one of the men proposes a plan which must indeed either
prove rescue to the shipwrecked or death to all.
"I tell you what, my men, if we are going to save those poor fellows,
there is only one way of doing it; it must be a case of save all, or
lose all, that is just it. We must go in upon the vessel straight, hit
her between the masts, and throw our anchor over right upon her
decks."
"What a mad-brained trick!" says one.
"Why, the boat would be smashed to pieces."
"Likely enough; but there is one thing certain, is there not? and that
is that we are never going home to leave those poor fellows to
perish, and I do not believe that there is any other way of saving
them, and so we must just try it. And God help us, and them!"
Not a single word against it now!
What, charge in upon the vessel in that mad rage of sea! Victory, or
death, indeed!
Most of the men on board the life-boat are married men with
families—loved wives, and loved little ones dependent upon them.
Thoughts of this, tender heartfelt thoughts of home, come to them.
"Well, and so we have, and have not those poor perishing fellows
also got wives and little ones, and are they not thinking of their
homes, and loved ones, as much as we are thinking of ours; and
shall we go home, having turned back from even the greatest
danger, without having tried all it is possible to try; go home to our
wives and little ones, and leave them to perish thinking of theirs?
No! please God, that shall never be said of us."
Such thoughts as these pass through the minds of some of the
boatmen. And what think the poor nearly drowned crew of the
unfortunate vessel.
There they are clinging to the loose and shaking rigging; a few feet
above the boil of the hungry and raging sea. They have seen effort
after effort made, and effort after effort fail; they have watched the
men do more than they ever dreamt it was possible for men to do;
and they have watched the life-boat live, and battle with seas with
which they never thought it possible a boat could for one moment
contend; time after time they have thought that the boatmen were
drowned, as they saw the huge curling waves break over the boat,
swamp it, bury it in the weight of their falling volume of water, and
for some seconds hide all from view; they have been watching the
men persevere in attempt after attempt, when they thought that
from sheer exhaustion it would be impossible for them to make
another effort for their rescue.
With equal wonder and admiration they watched the noble efforts of
the steamer, marked how nearly she was wrecked, and when she
failed, gave up all as lost; deciding in their minds that in such a rush
of broken sea, strength of tide and gale of wind, that it is impossible
for the boat to reach them, or for them to be saved, and all but one
give up all hope. When the captain says in despair, "The life-boat
can never make another effort," this man answers, "I have sailed in
English ships; I have often heard about life-boat work, and I know
that they never leave any one to perish as long as they can see
them, and they will not leave us."
"And look, here she comes again. O God help them! God help them!"
Yes, here she comes again; the steamer had hastened to tow her
well into position, well to windward of the wreck. "And here she
comes again."
Once more the boat heads for the wreck—this time to do, or to die;
each man knows it, each man feels it. They are crossing the stern of
the vessel; "Look at that breaker—look at that breaker—hold on,
hold on, it will be all over with us if it catches us, we shall be thrown
high into the masts of the vessel, and shaken out into the sea in a
moment! Hold on all, hold on! Now it comes! No, thank God, it
breaks ahead of us, and we have escaped. Now, men, be ready, be
ready!" Thus shouts the coxswain. Every man is at his station, some
with the ropes in hand ready to lower the sails; others by the anchor
prepared to throw it overboard at the right moment; round, past the
stern of the vessel the boat flies, round in the blast of the gale and
the swell of the sea; down helm, round she comes; down foresail;
the ship's lee gunwale is under water, the boat shoots forward
straight for the wreck, and hits the lee rail with a shock that almost
throws all the men from their posts, and then, still forward, she
literally leaps on board the wreck. Over! over with the anchor; it falls
on the vessel's deck; all the crew of the vessel are in the mizen
shrouds, but they cannot get to the boat, a fearful rush of sea is
chasing over the vessel, and between them and it. Again and again
the boat thumps on the wreck as on a rock, with a shock that almost
shakes the men from their hold.
The waves soon lift the boat off the deck, and carry her away from
the vessel. "Is even this attempt to be a failure? No, thank God! the
anchor holds; veer out the cable; steadily, my men, steadily; do not
disturb the anchor more than you can help; we shall have them
now! we shall have them, all will be well; ease her a bit, ease her,
see how she plunges, a little more cable; now for the grappling-iron;
quick, throw it over that line; there you have it;" and they haul on
board a line which had been made fast to a cork-fender, and thrown
overboard from the wreck early in the day, but which the boatmen
had never before been able to reach.
They get the boat straight, haul in slowly upon both ropes; cheer to
the crew: "Hurrah! mates, hurrah!" All is joy and excitement, but at
the same time steady attention to orders; now the boat is abreast
the mizen rigging, opposite to where the men are clinging. "Down
helm, the boat sheers in; haul in upon the ropes, men, handsomely,
handsomely;" the boat jumps forward, hits the ship heavily with her
stern, crashes off a large piece of her fore-foot. The men are for a
moment thrown down with the shock; two of the boatmen spring on
to the raised bow gunwale, and seize hold of the captain of the
vessel, who seems nearly dead, drag him in over the bows; two of
the sailors jump on board; "Hold on all, hold on!"
A fearful sea rolls over them, the boat is washed away from the
vessel; the anchor still holds; they sheer the boat in again; they
make the ropes fast, and lash the boat to the shrouds of the wreck,
thus verily nailing their colours to the mast. No! they will not be
washed away again until they have all the crew on board.
A sailor jumps from the rigging, the boat sinks in the trough of the
sea, the man falls between the boat and the wreck; a second more
and the boat will be on the top of him, crushing him against the rail
of the vessel, upon which the keel of the boat strikes and grinds
cruelly; two boatmen seize him, leaning right over the gunwale to do
so, they are almost dragged into the water; they are seized in turn
by the men in the boat, and all are with difficulty got on board.
Up the boat flies and crashes against the spar lashed to the rigging.
"Jump in, men, jump in all of you. Now! Now!" In they spring, and
tumble, falling upon the men, and all rolling over into the bottom of
the boat. All are now on board—all on board! "Hurrah! cut the
lashings, there, she falls away from the wreck; cut the cable, quick
with the hatchet; all gone! all gone! up foresail." The seas catch the
boat and bear her away from the wreck; away she goes with a
bound, flying through the broken water; the heavy wind fills the sail;
they are fairly under weigh, and with the precious freight for which
they had fought so long and so gallantly, safely on board. Thank
God! thank God! all are saved at last—saved at last.
Now the boat is through the broken seas away from the terrible
Sands, out in the deep water; the men have time to look at each
other; and how gladly, and yes, how fondly, they do so. Strangers
though they be, yet at that moment their hearts are warm to each
other with more than a brother's love—all is gladness and
thankfulness; they shake hands, the rescuers and the rescued, time
after time.
The saved crew are ten in number. They are Danes, and the wreck
the Danish barque Aurora Borealis.
Some of the sailors can speak a little broken English, and in such
terms as they are able the poor fellows express the depth of their
gratitude, and their wonder at being saved.
The boat makes for the steamer, which is coming down rapidly to
meet her; the crew of the steamer greet the life-boatmen with
cheers! Who can describe the joy they all feel at the successful
ending of their long battle with terrible danger and threatened
death! and great indeed is their sympathy with the saved from
death, for whom they and the boatmen have so willingly, and to the
very utmost, risked their own lives.
They lift the captain on board the steamer; he is thoroughly
exhausted; they carry him into the engine-room, and in the warmth
there, do their best to revive him, and he soon recovers. The Danish
seamen will not leave the boat; the life-boat crew tell the mate that
his men would be much more comfortable on board the steamer,
that the seas will be washing over the boat all the way in; but no, as
so frequently happens on such occasions, and as has been before
noticed, the rescued men feel so grateful to the life-boatmen, that
they are not content to leave the boat until they get to land. And the
mate replies, "No! you saved us, you saved us; we thought you
never, never do it; you had plenty trouble; we stop with you." And
they would not desert their friends, their brothers indeed, who had
done so much to save them.
In Ramsgate the anxiety is very great.
The steamer and life-boat have been out many hours, nothing can
be seen of them in the mist that hangs over the Goodwin Sands.
"Can anything have happened?" is the question that is restlessly put
from one to another.
It might well be so, in the terrific sea that must have been raging on
the Goodwin in so fearful a storm.
At about half-past two, hundreds of people are collected on the pier;
for the news that the life-boat is out always spreads like wildfire
through the town; and if there is any cause for anxiety on her
account, the whole town soon shares the apprehension, and throngs
of anxious men crowd the pier and harbour. Now the men who are
anxiously on the watch make out something looming in the mist;
and speedily the steamer and life-boat are seen, their flags are
flying, glad sign of successful effort, of rescue effected; and great is
the joy of all the lookers-on; steamer and life-boat speed between
the massive granite heads of the two piers, and the crowd that looks
down upon them as they come pitching and rolling along, greet
them with cheer after cheer.
The saved crew land, they are many of them very weak, and worn,
and exhausted; but all around is welcome, and sympathy, and active
service.
They are taken to the Sailors' Home, where warm clothing, and
beds, and goodly fare are ready for them, and the poor fellows soon
recover; some of them before they attempt to take any rest insist
upon writing to the loved ones at home, to tell of their safety, and of
their rescue from apparently almost certain death.
Doubtless these letters contain simple expressions of gratitude to
God, and of deep love for the dear wife, of many many kisses for the
sturdy little boy, or the laughing girl, for the children whose bright
eyes seemed so often staring at them so wistfully out of the storm,
and whom they never thought to see again; and doubtless contain
also expressions of great admiration and thankfulness for the
untiring courage of the English life-boatmen; and their full belief in
the expression of one of their number who told them in the height of
their danger, and in the very depth of their despair, "to take courage,
for the life-boatmen will never leave us while they can see us."
The Board of Trade, in recognition of the gallant services of the men,
presented them with one pound each. The King of Denmark
forwarded two hundred rix-dollars to be divided among them.
The boatmen are all poor men, and these presents proved very
acceptable; but the joy with all was, and will be while life lasts, that
God had in His providence and mercy so crowned their perseverance
with success, and enabled them to save their drowning brother
sailors. While all who heard of the circumstances, declared that
never by land or by sea was more gallant service rendered than was
accomplished by these brave boatmen, who in the face of all danger,
and of all hardship, determined to persevere to the death—
determined that while the shipwrecked crew still remained alive,
"They would not go home without them."
 CHAPTER XXVII.
OF SOME OF THE LIFE-BOAT MEN.

"The rank is but the guinea-stamp;

The man's the gold for a' that."
Burns.

It may be that some of my readers who have followed the

adventures of our Storm Warriors through their varied struggles and
heroic deeds, and have felt sympathy more or less deep for the
gallant life-savers, would like to know a little of one or two of the
leading men among those who, during the last twenty years, or
more, have done such good work in the Ramsgate life-boat on the
Goodwin Sands.
Gallant men who, time after time, have plunged their boat into the
thickest of the fray, and heedless of hardship, heedless of peril,
forgetful of self, intent only upon rescuing the distressed, have
laboured on through the dark stormy nights, 'mid the rush of the
waves, the howling winds, the fierce hurricane blasts, the spray, and
sleet, and snow—encountering all dangers, and persevering through
all difficulties, and repaid for all as they have brought home in the
morning's light the brother sailors, or the passengers, whom they
have been instrumental in saving from swift and terrible deaths.
Quiet, broad-chested, steadfast-eyed men, who, by all the scenes
they have witnessed, and by all the hardships they have suffered,
and by all the thoughts of the shipwrecked ones that they have
brought safely home, have it deeply written in upon their hearts:
that (to use their own simple and noble expression) they have a call
to save life.
Well indeed would it be for the world if more of those to whom
talents are given, and to whom stewardships are intrusted, and who
stand watching the many who are in danger, overrun by the dark
troubled waters of social life—wrecked in poverty, in misery, in
ignorance—wrecked for want of true teaching, true guidance, true
sympathy, true love—well would it be if more of these stewards of
God's loans might have the same noble conviction written in upon
their hearts: that they have a call to save life! Then would more lives
grow noble by noble work, and become happy in the consciousness
of the happy results, which God grants to the efforts of all those who
humbly seek to live and labour for the good of others; grants to
those who would sooner put to sea 'mid toil and peril, 'mid self-
sacrifice and opposition, rather than let the life-boats God has given
for their use rot and canker upon the banks, while the cries of the
despairing and the lost plead in vain from the dark storms and
troubled waters at their feet.
Yes, surely; the humble boatmen of our coasts, our "Storm
Warriors," afford a lesson by which many may well profit, in the
noble self-sacrificing way in which they realize their mission—that
they have a call to save life.
"Who shall be the first coxswain of our new Northumberland Prize
Life-boat?" was the question asked by the Ramsgate Harbour
Trustees some two and twenty years ago; and it was an important
and anxious question; for the good boat required skilful handling to
do efficient service, and if she failed in what was required and
expected of her, the life-boat cause would receive a serious check.
"No man better than James Hogben for the first coxswain; no man
among them all holds a higher character for cool courage, and skill,
and experience;" such was the answer. Hogben had been to sea
since he was a lad; for some years he was sailing in a small vessel
that traded between London and Ostend; then he sailed a little bit of
a boat, of about fifteen tons, between Ramsgate and Dunkirk and
Boulogne, winter and summer. Ask him about it now, and the
dangers he used to run; and he shakes his head, and with a quiet
smile tells you that, "He met with a good many very whole breezes,
very!" in that little craft of his.
After that, he had nearly twenty years of hovelling; cruising about
the Goodwin Sands in open luggers in the stormiest winter weather,
till he almost knew the Sands by heart; and so James Hogben was
appointed first coxswain of the Ramsgate life-boat.
Each time that he and his crew went out in her they gained fresh
confidence in her powers; and noble work the good boat did under
his command; indeed from the time the Northumberland life-boat
began her career at Ramsgate to the time she was broken up, from
December 1851 to July 1865, no fewer than two hundred and sixty-
one lives were saved by her and the gallant Storm Warriors who
sailed her, from vessels that were utterly lost; and nineteen vessels,
with their crews, were extricated from the Goodwin Sands and
brought safely into harbour.
For nine years Hogben was coxswain of the life-boat, and then came
that dread New Year's Eve, when doubts were thrown upon the
telegram that came from Deal; and there was delay; and the life-
boat got out to the south of the Goodwin Sands only in time for her
crew to see the Gottenburg overwhelmed by the waves, and to hear
the last cries of the drowning men.
Hogben had been out in the life-boat once before that day, and was
exhausted and unwell; and he had a nasty fall in the boat, and hurt
his knee badly, and soon fell seriously ill; his nerves were, for a time,
utterly shattered, and he who had been remarkable for his dauntless
courage became too nervous to walk even down the pier for fear of
falling over.
And although, after a while, he so far recovered as to be able to be
employed as a boatman in the harbour, and as a watchman on the
pier, yet he was never able to go to sea again; his iron constitution
broken down by some thirty years of Storm Warrior life, during the
last nine years of which he had been coxswain of the famous
Ramsgate life-boat.
Isaac Jarman was appointed coxswain in Hogben's room.
Who among Ramsgate boatmen has been better known in his time
than Isaac Jarman—or Mr. Jarman, as I suppose I ought to call him
now? for is he not master of a thriving public-house, which he will
take good care to keep respectable? and it will not be his fault if any
of his customers wreck themselves by taking too much drink.
But a yarn on Ramsgate pier with the life-boat coxswain, Jarman,
was for some years quite an institution with many a visitor to
Ramsgate, as well as with many an inhabitant.
When I have known Jarman (it does not seem quite natural
Mistering my old boatman friend) to be out in the life-boat, enduring
all the rage of the storm, and I have imagined the wild scenes 'mid
the strife of waters through which he has been passing, another
picture, one in very vivid contrast, has often presented itself to my
mind.
I have remembered the scene I saw one evening when I called upon
him, and found him with his family at tea.
"Come in, sir, come in; you won't disturb us: glad to see you."
His wife and, I think, five little daughters were there, and the baby
boy, the only son, was taken out of the cradle to be shown to me.
And as Jarman dandled the little fellow in his strong arms he said,
"Bless the boy! Bless the boy! he will make a life-boat coxswain
some day, that he will;" and I felt that all the thoughts of the danger
of the work was lost in the joy of saving life; I glanced at the
mother, half expecting some expression of dissent; no, her smile
showed that she was proud of her husband, and that all her
sympathies were with him in his noble work, and that she was quite
content that her only boy should in his day follow in his father's
steps and be, like him, one of the gallant band of life-savers who
guard our coasts.
And I have often felt, that however much such pictures of happy
home-circles dwelt in the heart of Jarman, and of his comrades, as
they have struggled out through the dark storms, and rushed into
conflict with the wild seas, yet that they have never caused them to
turn back from any danger, or to lessen one single effort in their
warfare to save life.
Isaac Jarman was turned out into the North Sea almost from his
cradle.
His father, a boatman, got severely hurt on board a hovelling-lugger,
so much so, that he was never fit for work again; as a matter of
course, the family became very poor.
Many hungry children to feed, and the arms once so strong now
powerless to labour for them, no wonder that the cupboard was
often empty, and the growing lads forced to do something for
themselves as soon as they were able.
And so Isaac Jarman, when a boy of twelve years old, was sent
away to sea on board a small fishing-smack called the Pledge; she
was only twenty-five tons, but used to sail long distances away to
fish in the North Sea, in all weathers, summer and winter.
The poor lad had all the clothing his parents could supply him with,
but that was little more than he stood up in; no waterproof overalls,
no sea-boots, the almost child had to rough it hardly enough; in bad
weather wet through day and night, with no bed to lie upon, and no
change of dry clothes; he used to throw himself down on the floor of
the small cabin, and lie coiled up before the little fire that glimmered
in the stove; the spray oftentimes washing down the hatchway and
surging up against his back, so that he had to be content with being
dry one side at a time; but strangely enough it agreed with him; as
that rough life, with all its strong sea-breezes, and its abundance of
good fish diet, does agree with many a little urchin, who, for
sturdiness, is not to be surpassed by any luxury-lapped little fellow in
the land.
After Jarman had finished his apprenticeship in the fishing-smack, he
was for some years in a collier, during which time he was twice
wrecked. And after that for seven or eight years he worked as a
Ramsgate boatman, always on the look-out in rough weather, day
and night, with but short intervals for sleep, for a signal of distress
from the Goodwin Sands, and a call for the life-boat; and so all his
training well fitted him for the post of life-boat coxswain; and when
the vacancy was made by Hogben's illness, Jarman was well chosen
to fill the post. For ten years he continued coxswain of the life-boat,
going out in her no fewer than one hundred and thirty-two times,
and helping to save between three and four hundred lives.
You may see many a medal that has been well won—and that is
worthily worn—by veteran soldier or sailor, but you will find few that
have been better won, or that are more worthily worn, than are the
four medals and a clasp that our Storm Warrior Jarman has to show
as records of his brave and self-sacrificing services; or the three
medals that Hogben can display on high days and holidays; or those
given to Reading, the brave master of the steam-tug Aid, and those
worn by many another gallant boatman or sailor, who, at Ramsgate,
or at other stations round the coast, have done true warrior service
in saving life from shipwreck.
After holding his post of coxswain for ten years, Jarman found the
exposure too much for him: he was out nine times in one fortnight,
five times in one week; he was seized with a very severe attack of
bronchitis, from which he never thoroughly recovered, and had
shortly to give up going to sea, and resign his position of coxswain.
He had three brothers and a nephew brought up as sailors, all of
whom have been drowned; well do I remember the night when his
last brother was drowned.
It had been blowing a heavy gale for three days and nights, with
continual snowstorms; the vessels at sea were in terrible peril: they
had no help for it but to drive blindly before the gale, unable to see
any of the lights or buoys which mark the sands and shoals. I had
heard that a Ramsgate collier was known to have sailed from the
North some days since, and could not be far off; and it was with a
sad heart and deep anxiety that I lingered on the pier that afternoon
watching the storm. I saw the boatmen all ready on the look-out for
any signal, but I felt, as they felt, that there could be but little hope
of any vessels being able to run the gauntlet of the many sandbanks
in that dark storm, or of being able to make any signals heard, or
seen, if they got into danger.
It was with a deep feeling of dread and apprehension that I left
Jarman and his fellow-boatmen to their dreary and almost hopeless
watch; and they watched on through the long dark hours of the
night, ready at any moment to man the life-boat; but they could
discover no signal—the roar of the storm was too great, the fall of
snow too continuous. And yet during those sad hours while the
boatmen crouched, sheltering themselves as well as they could—
watching, and listening, and waiting, but in vain—the terrible
tragedy was worked out; at daylight they saw a wreck in Pegwell
Bay. Man the life-boat! No, too late, she is bottom up, her masts are
gone; she must have been wrecked on the Brake Sand, and been
rolled over and over by the tremendous sweep of the sea, and the
tide. Yes, it is the Ramsgate collier that was expected, and that
Jarman's brother commanded; and he and all his crew have
miserably perished—perished within sight of home, and within half a
mile or so of the life-boat men who were so eagerly watching and
waiting for a call to their rescue, and to whom they could not make
their danger known.
And to this day you may see the sad record of the disaster in the
remains of the hull of the wreck, washed high up on the shore in
Pegwell Bay, and there half buried in the sand.
A great grief to Jarman this sad loss of his brother; and the poor
man left a widow and a large family of children; and when fine
weather came, in the early summer, many a friend who had had
pleasant chats with the life-boat coxswain on Ramsgate pier, was
surprised to find him diligently cruising in and out of offices in
London; he was canvassing for votes for the Merchant Seamen's
Orphan Asylum, and he laboured on until he succeeded in getting
two of his late brother's children into that famous institution.
Charles Fish was appointed to succeed Jarman as coxswain, and the
life-boat under his guidance continues to do good service; many
times has he been out in her, and many times has he, through much
hardship and danger, brought saved lives home. And may God in His
mercy continue to shield and bless him and the brave men who sail
with him, and aid them in their gallant efforts to pluck the
shipwrecked and the drowning from all the mighty strife of waters,
that battles with such deadly fury when the storms rage round the
fatal Goodwin Sands.
I cannot refrain from bearing my tribute of admiration to worthy
Daniel Reading, a brave, skilful, modest sailor, the master of the
steam-tug Aid; many and many a time has he rendered service,
which for daring and skill could not be well surpassed, threading in
and out of the Goodwin Sands 'mid terrible storms while seeking for
the position of wrecked vessels, or making short cuts to tow the life-
boat into position, that no time should be lost in her efforts to save
the drowning crews.
Yes! Reading, and James Simpson, the mate of the Aid, and William
Wharrier, the engineer, who have been together more than twenty
years, and have been out on almost every occasion that the life-boat
has been called for, have all three of them done noble and gallant
service time after time, and are indeed well worthy to be ranked
among the Storm Warriors who have nobly fought in the great and
good cause of saving life.
And many another gallant fellow might I mention, whose name
stands worthily on the Ramsgate life-boat roll-call; famous
specimens of what a British sailor should be—full of daring and
determination, and skill, and hardihood; men who are ready to
encounter all danger, and to endure any amount of hardship, in
answer to the holy call: to go forth and seek to save the
shipwrecked and the perishing.
 CHAPTER XXVIII.
THE NATIONAL LIFE-BOAT INSTITUTION.

"The quality of mercy is not strain'd;

It droppeth as the gentle rain from heaven
Upon the place beneath: it is twice bless'd;
It blesseth him that gives, and him that takes:
'Tis mightiest in the mightiest; it becomes
The throned monarch better than his crown;..."

Whatever interest my readers may have felt in the narrative of

gallant deeds wrought at one life-boat station on the coast, must be
intensified at the thought of the noble work that is going on all
round our sea-girt land—that, at almost all dangerous places where
vessels are likely to be in distress, or lives in peril, there are life-
boats ready to be manned, and brave fellows ever anxious promptly
to launch forth 'mid the wind and sea, and battle their way to the
rescue of the perishing. Yes, thank God, the gallant old Anglo-Saxon
blood is still to the fore; the spirit of our ancestors has not died out,
and we may well believe, from abundant evidence continually arising
from very diversified fields, that it has not even in the least
degenerated; for at all times can men be found ready to go forth
either by sea or land, to dare all that men should dare, and to do all
that men can do, when duty calls them to labours of self-sacrifice,
endurance, and courage.
And to the old bravery is now added modern science and
organization, and the British coasts are guarded by a volunteer navy,
equipped and marshalled by the Royal National Life-boat Institution.
Two hundred and thirty-three life-boats form, at present, the great
storm fleet of the Institution; the boats are stationed at the most
dangerous places on the coast, and are kept always ready for
service.
Those who are living inland may often notice how fast the high
clouds are flying overhead, and may listen to the soughing of the
rising wind among the branches of the trees; but no dread conflict is
pictured by the swift onsweep of the clouds, and the murmur of the
wind, fitful and angry though it at times is, scarcely seems to
suggest scenes of terrible peril, and of warfare unto life or death;
but watch the direction in which the clouds are flying; consider on
what part of our coast it is that this fierce gale strikes; imagine the
heavy sea that rolls in there, the foaming breakers, the air thick with
spray, the sound of the deep-voiced waves as they thunder down
upon the rocks over which they break; yes! and fancy that you can
make out through the low flying mist that several vessels are in the
distance trying to beat their way against the growing gale, and off
the dangerous lee-shore, and then rejoice as you feel fully assured,
if any of those struggling vessels are overwhelmed by the storm,
that it shall not be without a gallant effort for their safety that the
poor fellows who form their crews shall be left to perish, for you are
convinced that there are, if a life-boat station is near, storm warriors
keenly watching the scene, and that they are ready at any moment
to launch the life-boat and do battle with the storm and seas for the
lives of their brother-sailors. Yes! and it is one of old England's many
glories that it should be so.
"It is the soul that makes us rich or poor;" the old philosopher tells
us, and we feel that it is as true of a nation as of an individual. And
we count a nation rich with a true glory, that can point to many good
works organized and carried out for great and good ends by the
loving heartedness, generosity, unselfishness, and courage of its
people. And among such works is life-boat work; there are the rich
in soul who have the means and the open hand, and there are the
many who are rich in soul and have the courageous and strong
hand; and the hand generous with its wealth, clasps the hand
generous with its labour and readiness for peril, and together they
work out those noble results in which we all rejoice, and which the
records of the Life-boat Institution so fully declare.
And we should be less proud of our country if it were not so; indeed
we are almost inclined to think it a matter of necessity that in our
island home, where the history of our country is so interwoven with
the triumphs of our sailors, either in contests with our enemies, in
pursuit of discovery, or in the development of commerce, that our
sympathies with our sailors should indeed be deep and practical, and
that while we rejoice in the safety and the comfort afforded by their
labours, that we shall ever be prepared to help them in the hour of
their distress; and that there can be therefore little room for wonder
that those who realize the enormous traffic that is carried on around
our shores, the dangerous nature of our coasts, and the constant
casualties that are occurring, should earnestly desire the welfare of
the life-boat cause, and be ready to labour for its development.
The history of the life-boat movement, and of the foundation and
gradual development of the Life-boat Institution, are given in the
earlier pages of this book. The present condition of the Society tells
abundantly of the success it has enjoyed, and of the sympathy it has
gained, until now it is able almost to girdle our land with life-boat
stations.
Every year there is published by the Board of Trade, a register of the
number of wrecks that have taken place in the British Isles during
the previous year; the Life-boat Institution publishes a wreck-chart
compiled from these returns; each wreck is denoted by a black dot
which marks on the map the place at which the wreck occurred; and
a truly dismal appearance the map has. See how plentifully these
black dots are sprinkled round the coast-line, here one, and there
two, at other places half-a-dozen side by side, or growing in number
to ten or twelve, and then increasing still more rapidly at the more
exposed parts of the coast, or where dangerous sands are more
directly in the highway of vessels, so that in such places there may
be found twenty, thirty, or forty such marks, and at some localities
even more than these, as at the Sands off Yarmouth, the Goodwin
Sands, the Bristol Channel, and others, where line after line is
required to find room for the number of wrecks to be thus recorded.
For the past year no fewer than 1958 such marks are necessary to
complete the dismal list, for such was the number of the wrecks that
took place, within that time, in the seas that surround the British
Isles. The months of November and December were especially fatal,
heavy gales, thick weather, shifting winds, worked terrible havoc
among the shipping; the coasts were strewn with wrecks; and the
wreck-chart grew proportionally darker in its outline; and is it not a
terrible picture that it presents, as we recognise that almost every
mark speaks of a dismal scene of destruction and of peril, of ships
with wild seas breaking ruthlessly over them, and of men clinging
on, being, perhaps, beaten slowly to death by the constant rush of
the heavy waves, until, unless rescued, the shattered wreck breaks
up beneath their feet, and they are at once launched into eternity?
But let us look again at the chart, and we find red marks on the
coast lines opposite to the black dots which stud the sea; and
wherever the sea is more dark with the signs of wrecks, there do we
find the coast line opposite to such places pencilled the more
abundantly with the thin red lines which mark the life-boat stations;
and thank God that the red marks on this wreck-chart do now so
often confront the black! for if the black colour speaks of death, the
red colour speaks of life; if the one tells of terrible danger the other
tells of gallant rescue; if the one pictures sailors clinging to a few
spars, expecting death at every moment; the other pictures the
Storm Warriors ready at their various stations to man the life-boat,
and launch forth to wrestle nobly with the cruel seas, to snatch from
them their intended prey.
And moreover, if the one set of signs tells us of the dangers incurred
by the tens of thousands of sailors who are helping to minister to
the necessities, and comfort, and luxury of the population of
England, the other tells of men and women with warm hearts and
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