Wednesday, December 22, 2010

Wall Street Bonuses and Motivation

Felix Salmon links to a Washington Post article about large “wall street” bonuses:

Fortunately, there were many happy students - and the happiest were by no means the best paid. The most important factor behind job satisfaction was how supervisors handled performance appraisals. Bosses who took the time to give real feedback had happy employees. Those who blew it off had resentful and confused workers.

"Given that junior employees were spending 90 hours per week at work," one student wrote, "we all wanted to be recognized for our efforts."

For many executives, the myth that a big bonus is enough to ensure motivated employees persists. But at least for this next generation of business leaders, it's simply not true. When the public is already infuriated by outsize bonuses for chief executives, clinging to this model is a bad idea. Management matters. Good management pays off. Bad management - including ignoring management altogether - will cost us.

I think that this is an insightful point. It can be taken too far (high levels of compensation do make up for a lot of frustrating moments) but I think that the idea of "fairness" and "predictability" are key items. It's worth a lot to know that you will make $80K this year. Replacing that with a 50% chance of $40K and a 50% chance of $200K is not the same (even if the expected value is higher). Now, if you remove robust feedback and clear expectations than it is only reasonable that workers will not feel like they can predict what the outcome of their year end review. That will be highly demoralizing (and take even higher levels of compensation to correct for).

This principle actually goes back to Adam Smith (if not before). He (paraphrasing the original passage) pointed out that, for a worker paid by the piece, that you not only have to compensate the worker for all of the time spent between jobs but also for the anxiety that the worker suffers.

Is it really efficient to import this type of model to areas like education?

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