Multitasking at work: Do firms get what they pay for?

Employees and firms respond to metrics

Many studies have found that a pay-for-performance system can increase performance. For example, in the 1990s, the Safelite Auto Glass Company found that its windshield installers were installing 2.5 windshields in an eight-hour day, even though it only took about 1–2 hours to install a windshield. The company instituted a performance pay plan whereby the installer was paid a piece rate for each installed windshield; one year after the plan was instituted, productivity rose by over 40% [2]. However, the company found that while productivity rose, the quality of the installations fell.

Similar experiences have occurred at other companies; for example, one study introduced experimental treatments at five Chinese firms that manufactured electronics [3]. Before the intervention, some factories paid their workers a flat per hour wage, while the others paid piece rates. The experimental treatment involved offering workers monetary incentives based on productivity in addition to their flat or piece rate base salaries; the control group did not receive monetary incentives. This study found evidence of multitasking; productivity increased as a result of the monetary incentive, but so did the defect rate. Interestingly, this quality–quantity trade-off was only present for the workers whose base salary was a flat rate, which suggests that it is difficult to generalize results based on the impact of the introduction of incentives. The authors speculated that their finding could reflect the fact that workers who were paid a piece rate were already producing near their productivity frontiers, while the flat rate workers had much more room for productivity increases. Another example of multitasking is from Australian manufacturing workers who offered less help to co-workers when promotion decisions emphasized individual performance [4].

Multitasking is a particularly serious problem when a job combines tasks that are easy to measure with tasks that are hard to measure. An elementary school teacher offers a good example. Teachers often focus on two main tasks: making sure their students are at “grade-level” in reading and mathematics, and inspiring students to love learning for its own sake. Measuring the teacher’s performance on the first task is relatively easy; at the end of each school year, students should be given a reading and mathematics test. The school’s principal need only compare the students’ test scores at the end of the year to their scores at the end of the previous academic year; the difference would measure the teacher’s performance on the first task. By contrast, measuring the teacher’s performance on the second task, i.e. “love of learning,” is almost impossible. As such, when tracking and rewarding teacher performance, only the first task is measured. For teachers in this situation, the incentive is to “teach to the test,” potentially causing them to neglect or ignore entirely the second task. In general, when a job combines tasks that are easy to measure with tasks that are hard to measure, firms should consider whether it might be preferable not to use incentives at all because of the risk that the incentive plan will encourage the employee to ignore the hard-to-measure task.

There are many other examples of the multitasking problem. One example from the health care sector is based on the Nursing Home Quality Incentive (NHQI), which was launched by the Center for Medicare and Medicaid Services (CMS) in 2002 in the US. CMS chose to publicly report only a subset of the quality measures that were tracked as part of their random inspection program of CMS-certified nursing homes. The fact that NHQI only reported a subset of the quality measures suggests that multitasking could play a role in understanding the impact of the mandated information disclosure on nursing home quality. For example, one study found that quality measures along the NHQI-reported dimensions improved; but along the NHQI-unreported dimensions, there was a significant deterioration (Figure 1) [5]. In other words, the nursing homes reallocated resources across dimensions of quality, based on whether NHQI did or did not disclose those specific quality measures. However, due to insufficient data the study was unable to conclude whether this reallocation was harmful to consumers. Another study of childcare providers found that regulations that instituted quality requirements resulted in a reduction in staff wages that could have negative effects on the quality of the services provided [6].

Employees can game the system

Employees often manipulate incentive systems to maximize their compensation. When employers use non-linear period-based compensation systems, employees have an incentive to engage in “timing gaming.” An example of a non-linear period-based compensation system is when salespeople are compensated according to an accelerated commission scale, whereby the commission for the same deal could be very different depending on the quarter in which the deal closes. The commission depends not only on the size of the deal but also the monetary value of the deals that have already been closed in the quarter.

A study of a leading enterprise software vendor found that the closure of deals within a given quarter was not smooth (Figure 2) [7]. Rather, there was a large spike in completed deals on the last day of the quarter, as well as smaller spikes early and in the last few weeks of the quarter. These spikes were correlated with the average discount offered by salespeople to customers. At the start and end of the quarter, discounts were above 35%, whereas in the middle of the quarter they were below 30%. Salespeople were incentivized to offer larger discounts at the end of each quarter because their commission would be higher since they had already closed deals in that quarter. Similarly, if the salesperson was having a bad quarter, he/she had an incentive to “pull” deals into the subsequent quarter. Due to this “timing gaming,” the vendor in this study experienced a 6–8% loss of revenue due to lower than needed pricing.

Despite the cost of “timing gaming” to companies, non-linear compensation systems are commonly used for salespeople. Research in behavioral economics suggests that this may be due to behavioral biases; an experimental study found that non-linear systems attract and retain highly motivated subjects who are top performers [8]. In addition, non-linear compensation systems have the advantage of incentivizing less productive employees to strive to achieve the levels achieved by top performers. Employers thus face a dilemma in weighing the costs and benefits of these compensation plans.

Adding metrics changes employees’ behavior

Gaming by employees can be addressed by adding metrics to the compensation scheme. The purpose of these additional metrics is to address unintended drawbacks associated with pay-for-performance schemes (e.g. quality reductions), or to better align firms’ and employees’ goals. For example, in the case of Safelite, quality problems were addressed by requiring the installers to repair defective installations before they could take on new jobs.

In another case, an international law firm faced a multitasking problem when it paid its partners solely based on their billable hours [9]. The partners were not incentivized to share billable hours with members of their team or to spend time on non-billable activities that would benefit the firm, such as presenting at conferences, attending firm meetings, and training and mentoring associates. The firm revised its compensation plan to address this multitasking problem by reducing the commission for billable hours and introducing a bonus that included objective and subjective metrics that measured a variety of non-billable activities. In response to the new compensation plan, the partners significantly increased their non-billable hours and decreased their billable hours. As the partners spent more time on non-billable leadership activities, billable work was shifted to team members. The researchers found that profits generated by team members rose in the short term; however, they were unable to estimate the long-term impact of the new compensation plan on profitability. While law firms have historically relied on billable hours to compensate their partners, today, fewer than 10% use this formula approach [10]. This dramatic change demonstrates how law firms are responding to the multitasking problem.

Another example is that of physicians in Quebec who were originally paid on a fee-for-service basis. When their compensation plan was changed to a mixed system (combining a fixed fee per day with a partial fee for services provided), they decreased their billable services but increased the average time spent per service, i.e. providing better quality care to their patients [11].

Subjective performance evaluations

Some firms use subjective performance evaluations to solve the multitasking problem. This is especially true when some components of performance are difficult to measure. For example, in evaluating the performance of a manager or team leader, senior management might want to measure the person’s skill as a mentor of junior colleagues. To do this, information about the quality of the mentorship could be gathered from the mentees themselves. Another component of performance that might require subjective evaluation is teamwork, in which case, members of the team could be asked to evaluate how well the employee in question functions within the team. While subjective performance evaluations may enable the firm to reward hard-to-measure tasks, they have significant drawbacks. First, they are very time-consuming; senior management needs to gather data from many individuals and process this data to come up with a summary recommendation. Second, the employees being evaluated will have an incentive to spend time developing good relationships with those evaluating them, rather than spending time on their jobs. Third, they can have a detrimental impact on employee morale, as employees may question the fairness and accuracy of the evaluation process. Subjective performance evaluations are thus more likely to be successful when the employees trust the managers who are evaluating them.

Balanced scorecard

Many large organizations evaluate performance at the group level (e.g. business unit, branch, or team) and often use a multidimensional performance measurement system called the “balanced scorecard” [12]. With the balanced scorecard, the group’s performance on a large number of metrics is monitored and rewarded. Proponents of the balanced scorecard argue that it helps managers to improve performance by monitoring and rewarding a range of activities that cover multiple perspectives (such as financial, customer, internal, and innovation/learning). However, the balanced scorecard may not be an effective incentive mechanism because it provides no information on how managers and workers should trade off different objectives.

One study examined a multinational distributor of heating and plumbing products that introduced a balanced scorecard in one of its UK divisions [13]. The researchers compared the performance of this division to that of another division that had similar characteristics but did not employ the balanced scorecard. Prior to introduction of the balanced scorecard, employees in both divisions received a bonus that was based on branch-level profits. Managers were incentivized to adjust the timing of capital investments to affect bonus payments, and they had an incentive to compete for business against other local branches within their own division. After the first division adopted the balanced scorecard, the performance of each of its branches was evaluated using 16 metrics that were designed to encourage workers to put more effort into activities that were previously not rewarded but had a positive impact on firm-level long-term profits. The list of metrics included both financial and nonfinancial indicators of performance. Examples of nonfinancial indicators were customer satisfaction, customer retention, employee satisfaction, and employee retention. The design of the balanced scorecard was supervised by senior management who consulted regional and branch managers for their input. The fact that so many metrics were included in the final scorecard indicates that the design committee could not reach consensus on a small number of metrics. In addition, the design committee decided that each of the 16 metrics would have equal weights in calculating an overall measure of branch performance, which, in turn, would determine the monetary bonus amount offered to employees.

The researchers found that, compared to the division that did not have the balanced scorecard, sales increased in the division with the balanced scorecard, but costs also increased, so profits did not rise. However, further analysis showed that profits did increase in branches that were run by more experienced managers (Figure 3). This result is important because it demonstrates that multidimensional performance measurement systems can have a positive effect on a firm’s financial performance if managers and staff understand how to act on them. Interviews allowed the researchers to determine specific ways that the experienced managers overcame some of the difficulties with the balanced scorecard. This finding suggests that more experienced managers may be able to train less experienced managers in how to respond to multidimensional performance measurement systems.