It's the Way You Pay It That Get's Better Results - Case Study Example

Lawrence Oon Examiner **** Economics ****** 20 November 2005 Performance of Senior Executives in a Firm Coase, in his infamous article The nature of the Firm states, "It seems improbable that a firm would emerge without the existence of uncertainty" (5). Organizational dynamics allow for consistent change, especially in the context of evolution in economics. Much has been researched and speculated in the ever-evolving world of organizational structures, and personnel management, similar to the lines Coase established in 1937. Simultaneously, much has been deliberated upon the dynamics of the higher management, their role as leaders, and most importantly, their ability to inspire others by personal example. Interestingly though, the changing times have never seen difference of opinion in one particular area; how the masses criticize their bosses at large! One major factor which generates such opinion is the considerable difference in remuneration and perks for the higher ups, which are always in sharp contrast with their subordinates. Hereunder shall be a discourse of how examples from a very different arena of sports, can be successfully extrapolated to reconstruct the work infrastructure of the top-level management. Incentive Based Work Environment In psychology, the core theories of behavior modification revolve around the concept of reward and punishment. And this being the primary science that studies human behavior, much can be applied from it unto the realm of economics. Organizational psychology and workplace economics in any setting, therefore, is incumbent upon the fact that people work because of their motivation and incentives. Regardless of passion and loyalty, the primary needs of a person have to be fulfilled in order for him to perform beyond the ordinary. Incentives, here, play the role of that little 'extra' spice that is added to life; something more that the employee and the organization are looking forward too and yearn to achieve. At this point in time, it is important to consider the Directorial level of the organization both as human beings, and as employees of the organization! For a small child, a toy or a candy can play the role of a potent incentive. Obviously, the adult human demands for much more than that. Nonetheless, the primary role that is played by any incentive-providing-stimulus is the same - it generates more interest in a person, and the overall productivity of work increases. But here, an interesting fact must be considered. The same child, if knows, that no matter how much he cries or yells he will get the toy, the incentive factor diminishes to a negligible level. However, when the same toy is presented to him on accord of providing a disciplined stance, or taking his supper on time, than it acts as a positive incentive and concrete behavior modification can be seen. Exactly on the same principle, if any employee of an organization, regardless of seniority level, knows that come what may, the actual increment in pay and perks will be there, than it is much too obvious that the productivity shall not be the same. However, when a realization is set into the individual that increments shall be performance-based, than we see a positive vector definition for work by the individual, which provides a symbiotic benefit to the organization. Now here, focus is required upon the top-level management. The aforementioned theory is generally applied on subordinates in all organizations at large - do good work and get good pay. Yet, contrary to the theoretical norms of economic and organizational management, the Mangers are kept out of this 'struggle for work'. Once a person is in the higher ranks, it seems predestined that the ladder will only go up, much in the manner of an escalator! This not only creates a bias and division in understanding of human workplace ethics, but also creates unrest in the minds of lower-levels in the firm. (a) Analogy from Payment Systems for Jockeys Though some top managers may find it bizarre to be compared to race jockeys, yet the comparison in relation to the said topic is quite significant. "Using data on jockeys' pay and performance, 1983-1995, it is shown that the incentive pay scheme whereby jockeys receive 7% of the prize money for their winners elicits much improved performance (controlling for horse quality) over a retainer system which gives jockeys a flat fee for riding for 1 owner" (Fernie and Metcalf). This goes on to advocate the stance that incentive does positively affect performance. Now, every time, it would at the back of the mind of the jockeys that if they end up succeeding, they shall embrace a substantive percentage of the prize which previously they could not enjoy. This makes them feel part of the job itself, and a renewed sense of vigor and passion is instilled into the task itself. Projecting on the same lines, if mangers are also wary of the fact that their annual payment increase is rendered directly proportional to the stock price or the company profits, then a similar increase in performance is most likely to be witnessed. Leaders, who travel a road where the destiny is visible, rarely strive to change direction. However, those who endeavor without having assurance of reaching the end, make the maximum difference in their and others' lives. If a firm desires for directors who can think and act 'out-of-the-box', then they have to create circumstances for them doing so. Being humans, incentive driven behavior is essentially their primal need as well. Any form of assured privilege in the long run is taken for granted and is considered as a right. This in turn provides the opposite effect in certain cases in terms of performance. In addition, Fernie and Metcalf further state about the jockeys that "As a result, the retainer system is fading away". This system involved a flat rate payment for the employee. Regardless of the humungous amount of incentives that a top-man might get, if it is a regular feature, then it loses its value. It can be comparable to the 'charms' one might feel being the President of the United States. One should ask Clinton or Bush if their second term in office was as 'charming' as their initial phase. It all dies out if you don't have to strive for it. This also goes on to show that there is always an additional potential or margin for work. The human limits know no bounds; provided appropriate tools are utilized to extract this extra bit. With reference to economics, these of course fall under the realm of signifying with the appropriate level of compensation and reward for an individual so as to produce the desired result and may be even more than that. Keeping this in view, if the CEO of a firm is cognizant of the fact that his personnel have hidden potential in them and leaves it that way, it is nothing else than a leadership failure on his part with regards to understanding and managing human resources. How to get work done out of people effectively is the bare minimum a corporate boss should be able to do. Also, in the context of personal growth, when a manager feels that he has evolved upon the corporate policy, and has stepped one step closer in the direction of the company vision, the sense of professional achievement he feels is manifold. These invaluable feelings get missed out in the year if all his activities are taken as one big whole and he is given an increment for it. However, when he is rewarded for particular tasks and assignments, he feels motivated, closer to his team and more loyal to the organization. This level of personal growth is more relevant and important for a person than a certified degree of academic diploma in his respective level of expertise. (b) The Economists' Answer The aforementioned instance from sports can be a very interesting yardstick for economists planning in organizational strategy. It has to be identified with, that essentially, whatever the profession of the jockey, he is a person doing a job. Over the years, an increase in his performance was desired, and the people at the helm of affairs decided that he should have a share in the cake. Essentially, the very same is happening in the corporate world as well, but in a very different way. The lower level management are given the share they earn. However, the same is not the case usually with the senior executives. They earn by virtue of their position and not by virtue of their effort. It is more like the system of government in UK; the Queen enjoys the privileges by virtue of her position, whereas the Prime Minister enjoys the benefits by virtue of his effort! This imperialistic example is so true in the case of many organizations. Once you make it to the 'Board Room', the rest is history. It is just like the jockey getting a flat rate on his pay regardless of how he works. Here, economists have to take up the challenge of identifying with the cost incurred, and the work output. Devising the performance vs. payment plan-of-action will not be too complicated for economists. It is just like the automated interest calculation in bank accounts, or the minimum payment amount in credit cards - as soon as one reaches the threshold, the algorithmic function declares the amount to be paid. One can already preplan what is to be given to a senior manager, but it is not to be declared to him. You make him strive, and give him in different pockets and packages. He will be happy for the sense of achievement at the completion of various assignments, the work productivity will increase, and no extra cost will be made to the firm! Easier said than done, perhaps, but it has to be like this. The disparity has to be minimized with the junior workers, and the difference is to be shifted among the managers themselves. Not all horses in a cart pull the same weight! Similarly, a creative, hardworking and visionary supervisor should feel the difference; in his heart, his annual report and his bank account. The asymmetry in the behavior and orientation of senior managers would thus be visible, and it would be easier for the head of the organization to pick out those in shining armors. There is an additional insight upon the issue by Gregg, Jewell and Tonks, "We also explore the heterogeneity of the pay-performance relationship across firms and find that board structure, firm size, industry and firm risk all have an effect on executive compensation" (2). This turns out to be very relevant when viewed objectively. The pyramid or hierarchy that is formed within the organization greatly affects the power and benefits of the supervisors. A multi-national corporation, for example, has a very vast number of senior level mangers. For the Board of Governors and the CEO, they are equivalent to the masses at large. In this particular case, as there are hundreds if not thousands of similar managers around the globe, incentives are usually performance based. Competition is fierce, and promotion is dependent upon good repute in the organization. Here again we see the worth and presence of the 'jockey payment system'. In contrast a localized and independent firm can be reviewed. Here, the pyramid top sees a very steep gradient in the triangle, making the senior managers very close and almost indispensable for the CEO. In such a case, their credits and benefits are assured before hand, and their imperialistic control is ensured within the organization; much like a King would do with his nobles. At the same time, we must consider the economic dynamics of the organization. If a firm is doing well, maybe the mangers can get away with assured pay scales and nobody would mind. However, the case turns opposite when the company takes a dip in the stock market. Regardless of organizational secrecy, there is just that one person in the finance department who would disclose to the rest of his peers the pays of their bosses. This, when paired with the news that their annual increment is 2% less because of low productivity, is not at all taken in good spirits by the employees of the organization. Though revolutions in the corporate sector are not fashionable, yet the low morale of the workers would amount to nothing short of that. This increasingly gives them the feeling that either they or their bosses are not part of the same system, because the same norms are not applied on them both. Conclusion Every firm yearns for maximum output, both in terms of productivity and human resource. Ensuring this extent of output is a steering job that is undertaken by the senior management. The credible ways, through which a symbiotic and positive working relationship can henceforth be established, lies in the adequate payment methodologies of the top-level. A symbolic analogy of the jockeys has been discussed, which clearly signifies the probability that performance of the senior managers is likely to increase if incentive based work is provided, instead of taken-for-granted economic assurance. Works Cited Coase, Ronald. The Nature of the Firm (1937). 19 Nov 2005 . Fernie S and Metcalf D. It's not what you pay, it's the way you pay it that get's better results. Labour, 1999. Gregg P, Jewell S, and Tonks I. Executive Pay and Performance in the UK 1994-2002. University of Exeter, 2005. Read More