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| Overpaid Bosses |
In his famous book, Logic
of Life Harford writes, “Not many people lie on their deathbeds wishing
that they had spent more time in the office. Ah, the office: the mournful
gloaming under the fluorescent strips, the monotonous swish of the photocopier, the ‘ping’ as e-mails arrive
from bullying bosses, work-shy colleagues and backstabbing rivals. Much of it
is little better than spam.”
The source of all these
curses of the office is the lack of information – data on who does how much and
what quality of work, who is hard-working and who is a laggard, who is honest
and who compromises etc. Lack of data muddles the organization’s decision on
compensating the employees for their work. Much of this vital information is
hard to come by, so it is hard to pay people truly as they deserve. HR managers
grapple with these challenges by designing what they call performance
management systems, drawing intimidating forms and
charts, meetings and discussions with aw-inspiring jargons (ah! ‘assessment centers’,'performance drivers', 'score cards')
and so on. Though these ‘initiatives’ create an aura about performance
management, their real effect is obfuscation of the working of the office. That
is why Harford wonders, “The office is routinely satirized as the world’s most
illogical place: could there possibly be a rational explanation for it all?”
A look outside the office
throws some light. Being a writer and columnist naturally Harford looks at publishing.
A publisher pays the author by the number of copies of the book sold. Copies
sold can be tracked correctly. But that is not the case with decisions a
manager makes or its consequences.
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Overpaid Bosses |
In factories, piece rate
payment is logical, improving output, productivity and quality. Piece rate is payment
based on output or performance. But even in factories there are many operations
or functions which cannot be accurately measured and attributed to an
individual. Monitoring and measuring these are too cumbersome.
Since rewarding better
performance is important for the organization, but measurement and monitoring
is not cost effective, bosses look for other ways of evaluation and rewarding.
Rather than looking clearly at targets, objectives, measurable results etc.
they use discretion, which is based on their impressions of how well the
employee has done rather than on any dependable data. Presumably, though performance
cannot be defined it can be recognized when an employee has performed. This is
in contrast to management philosophy of every action to be based on data and
every re sult to be measurable. Discretionary decisions of bosses mean that pay
rises are given to employees on the basis of performance which everybody claims
to know but nobody can define.
That is where tournament
theory enters. Two economists, Edward Lazear and Sherwin Rosen came out with
the brilliant idea of turning the office life into a tournament. In a
tournament you pay for relative performance. The winner gets the highest reward;
the runner up gets the next highest, usually half of the winner’s take and the
loser none. So, in office where you cannot be specific about performance, you
pay the best performer the highest, the next one less and so on. Even though it
is difficult to assess absolute performance, it is easier to assess the
performance of one compared to the other. According to Lazear, “The essence of
tournament theory is that relative performance matters. The theory predicts
that workers should be judged and rewarded on the basis of their performance
relative to others in their comparison group”.
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| Overpaid Bosses |
The problem with this is
that employees may adopt one of the following three strategies:
(a)
Work hard to
get the reward
(b)
Create
obstruction to others from doing better than them, backstabbing.
(c)
A combination
of (a) and (b).
However, tournament
theory has stood the test of time and has been supported by subsequent
empirical research. Ed Lazear, has comments: “The salary of the vice president
acts not so much as motivation for the vice president as it does as motivation
for the assistant vice president”. Tim Harford says it also makes a perverse
kind of sense: the more grotesque your boss’ pay, and the less he has to do to
earn it, the bigger the motivation for you to work with the aim of being
promoted to have what he has (and do not have to do what he does not do).
But who does the CEO
compete with? Hartford
So, next time you feel
you have Overpaid bosses , relax! The CEO does not take this onerous
burden lightly. In Alexander Kjerulf’s words, the CEO laments, “Sure it is
tough to be ludicrously overpaid, but it is a burden I gladly carry for your
sake”
By V.K.Talithaya (vktalithaya@managementmasala.com)
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