Why bosses should be careful when using performance-related pay
May 28, 2013 Leave a comment
Why bosses should be careful when using performance-related pay
May 25th 2013 |From the print edition
OF ALL a firm’s inputs, its workers’ effort is perhaps the oddest. It is as vital as land, factories or machines, but much harder to control. It is often impossible even to measure. A manager can gauge the firm’s output, but not the effort people put in, beyond crude gauges such as the time they spend on the job. Employees have the informational edge, knowing their own effort, output and skill level. This asymmetry makes it hard for managers to distinguish, for instance, between the low-skilled but diligent and the skilled but lazy. Monitoring schemes to reward hard-working employees and punish slackers can boost effort, but they can backfire badly, too.
What should firms do? A good place to start is with the worst kind of behaviour: crime. In a paper published in 1968 Gary Becker, of the University of Chicago, set out the factors which policymakers should consider when deciding on what resources they should devote to detection. In his model criminals calculate the risks and benefits of bad behaviour, taking into account the possible monetary reward, the probability of being caught and the subsequent punishment. To cut crime authorities must increase the probability of being caught, the severity of the punishment, or both. This approach can also be applied to less extreme forms of bad behaviour, such as slow or sloppy work: firms may have to monitor individual workers, and then reward the good and punish the bad. Read more of this post