Dan Ariely on Compensation Strategies

The latest Bloomberg Businessweek has a short Dan Ariely essay on compensation strategies, and I think it has a great deal of relevance to our continuing debates over public sector compensation:

It’s like the difference between asking someone to help you change a tire and offering them $5 to do it. The moment you introduce money, you change how the person views the exchange. They say, “Oh, this is work. I don’t work for $5. Give me $150 and we can talk.” When I was at MIT, they told us we had to teach 112 points per year. They had a complex formula for how many students and how many hours and so on would translate into teaching points. Basically, MIT was conditioning me to put the least effort into getting the most points. This became the game. I was quite good at it. And I taught very little. …

A consulting company once told me they made a rule that if you stayed until 8 in the office, you could order food and use the car service to get home. So what happens? A ton of people are there at 8. Nobody’s there at 8:05. It’s the same with pay: If you are hiring the right people, you don’t want to include anything too specific in the contract. You want people to buy into the objectives of the company. Be specific about those, and then trust people to quickly understand how they can help maximize the objectives at each point in time. People actually know to a high degree which actions are good for the company and which are not—regardless of what you pay them for. [Emphasis added]

As E.J. McMahon observed at the Manhattan Institute’s recent conference on the terms of public employment in America, it is common for older public employees to literally count the days until they’re eligible for their pension. The structure of public employment discourages recognition on the basis of achievement, compensation structures are extremely rigid, and so workers focus their efforts on gaming the points system. 

This rigid structure is the legacy of civil service reforms of an earlier era, a response to patronage systems that were seen as antithetical to a spirit of bureaucratic professionalism, an idea that was very much in vogue in the emerging industrial corporations of the time. In the years since, however, we’ve placed a heavier emphasis on nimble forms that, as Ariely suggests, are defined by a shared culture and shared objectives. A public sector analogue might be a KIPP school, which devotes a great deal of time and attention to the culture of the institution, on the part of students but also, and more centrally, on the part of the administration and the faculty. A sense of mission is what counts, not defining a rigid salary schedule.

When our education debates turn to compensation for teachers, I think we’re taking a wrong turn. Replacing one top-down compensation structure with another one isn’t a quantum leap, though of course we could make some improvements. The really important thing is to promote the emergence of specialized instructional providers that can develop distinctive cultures, that can choose their own compensation strategies that reflect their missions, and that can compete by offering distinctive, attractive services to parents who have access to useful data on results. 

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute Policy Fellow. He is a contributing editor at The Atlantic and National Affairs, a member of the ...

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