There has been an increasing interest in the organizational economics literature on the transformation of work organization in many modern firms. Traditional forms of organization such as vertical job ladders and narrow job descriptions with extensive specialization are being replaced by what are known as "flexible work practices" characterized by broader job descriptions, flatter hierarchies and more generally, functional flexibility in the organization of work. In this paper, I examine the role of one such flexible work practice widely adopted by technology-intensive firms - namely flat hierarchies and horizontal work organization - in creating incentives for workers to diversify their skills. There has been a growing concern that the traditional promotion system in large firms is maladapted to managing technical human assets. A primary concern is that incentives in such firms are ill-equipped to deal with the more rapid skill-obsolescence of a technology-intensive environment. In industries that are technology intensive, rapidly changing technology often renders workers' skills obsolete.
The main argument extended in the paper is the following. As compared to flat firms, the vertical firm has a greater incentive to invest in specialization as workers try to win promotions within projects that use their specialized skills. But, when the expected loss from output due to skill-obsolescence is high, it may be more efficient for firms to invest in skill-diversification. In such situations firms may adopt organizational forms with flat hierarchies in order to commit to investment in skill-diversification by curtailing promotion opportunities.
I introduce a distinction between two kinds of human capital investment: skill specialized and skill-diversifying investment. In the first kind of human capital investment, the worker enhances her productivity in her primary skill. In the second kind of investment, the worker acquires a new skill. In terms of the firm's organizational choice, I look at two kinds of firms - vertically organized firms where each project within the firm has promotion ladders with higher job levels being more sensitive to worker productivity in her primary skill and flat firms where every project only has one job level.
My analysis yields several interesting findings. First, when there is a risk of skill-obsolescence, there is a greater probability of horizontal movement of workers across different projects rather than a vertical movement along a promotion ladder within a project. Second, when the expected loss in output due to skill-obsolescence is high, the vertical firm's incentive to provide investment in skill-diversification will be less than efficient. In this case, a firm with a flat hierarchical structure can improve incentives for investment in skill-diversification when it is efficient.