Lessons from sports can allow managers to
develop better policies at “normal” workplaces
Economic theory has many predictions regarding
how workers should be paid and how workplaces should be organized. However,
economists’ attempts to test these in the real world have been hampered by a
lack of consistent information about workers’ productivity levels.
Professional sports offer a potential solution, since the performance of
individual sportspeople is easily observed and yet many of the same problems
faced by managers in workplaces still apply. In many ways, sportspeople may
be less atypical of the modern workforce than farm laborers, doctors, or
other groups of workers that are often scrutinized by economists.
Individual bonuses do not always raise
performance; it depends on the characteristics of the job
Economists have for a long time argued that
performance-based bonuses raise performance. Indeed, many firms use bonuses
tied to individual performance to motivate their employees. However, there
has been heated debate among human resources professionals recently, and
some firms have moved away from individual performance bonuses toward fixed
wages only or collective performance incentive schemes such as
profit-sharing or team incentives. The appropriate approach depends on each
company's unique situation, and managers need to realize that individual
bonus plans are not a panacea to motivate employees.
Workers care about employers’ social causes, but
the public sector does not attract particularly motivated employees
Employees are more willing to work and put
effort in for an employer that genuinely promotes the greater good. Some are
also willing to give up part of their compensation to contribute to a social
cause they share. Being able to attract a motivated workforce is
particularly important for the public sector, where performance is usually
more difficult to measure, but this goal remains elusive. Paying people more
or underlining the career opportunities (as opposed to the social aspects)
associated with public sector jobs is instrumental in attracting a more
productive workforce, while a proper selection process may mitigate the
negative impact on intrinsic motivation.
The efficacy of hiring strategies hinges on a
firm’s simultaneous use of other policies
When an employer fills a vacancy with one of
its own workers (through promotion or horizontal transfer), it forgoes the
opportunity to fill the position with a new hire from outside the firm.
Although firms use both internal and external hiring methods, they
frequently favor insiders. Internal and external hires differ in observable
characteristics (such as skill levels), as do the employers making the
hiring decisions. Understanding those differences helps employers design and
manage hiring policies that are appropriate for their organizations.
Despite major efforts at equal pay legislation,
gender pay inequality still exists—how can this be put right?
Despite equal pay legislation dating back 50
years, American women still earn 18% less than their male counterparts. In
the UK, with its Equal Pay Act of 1970, and France, which legislated in
1972, the gap is 17% and 10% respectively, and in Australia it remains
around 14%. Interestingly, the gender pay gap is relatively small for the
young but increases as men and women grow older. Similarly, it is large when
comparing married men and women, but smaller for singles. Just what can
explain these wage patterns? And what can governments do to speed up wage
convergence to close the gender pay gap? Clearly, the gender pay gap
continues to be an important policy issue.
Increased competition affects the pay incentives
firms provide to their managers and may also affect overall pay
Deregulation and managerial compensation are two
important topics on the political and academic agenda. The former has been a
significant policy recommendation in light of the negative effects
associated with overly restrictive regulation on markets and the economy.
The latter relates to the sharp increase in top executives’ pay and the
nature of the link between pay and performance. To the extent that
product-market competition can affect the incentive schemes offered by firms
to their executives, the analysis of the effects of competition on the
structure of compensation can be informative for policy purposes.
CEO pay, often contentious, is the product of
The escalation in chief executive officer (CEO)
pay over recent decades, both in absolute terms and in relation to the
earnings of production workers, has generated considerable attention. The
pay of top executives has grown noticeably in relation to overall firm
profitability. The pay gap between CEOs in the US and those in other
developed countries narrowed substantially during the 2000s, making top
executive pay an international concern. Researchers have taken positions on
both sides of the debate over whether the level of CEO pay is economically
justified or is the result of managerial power.
What evidence exists on whether bad bosses
damage workers’ performance, or good bosses enhance it?
A good boss can have a substantial positive
effect on the productivity of a typical worker. While much has been written
about the peer effects of working with good peers, the effects of working
with good bosses appear much more substantial. A good boss can enhance the
performance of their employees and can lower the quit rate. This may also be
relevant in situations where it is challenging to employ incentive pay
structures, such as when quality is difficult to observe. As such, firms
should invest sufficiently in the hiring of good bosses with skills that are
appropriate to their role.
Financial incentives and changes in working
conditions are key to many broad and tailor-made programs
Do workplace programs help reduce worker
sickness absence? Many programs are based on the principle that the
employee’s decision to report an absence can be influenced if it is costly
to be absent. Firms can reduce absenteeism by implementing broad programs,
including performance pay, general improvements of working conditions, and
strengthening workers’ loyalty to the firm. Specific programs, such as
grading partial absence, seem to be effective at reducing long-term
absences. However, firms will be less inclined to implement such programs if
they can shift the financial burden to social security programs.
Challenging jobs and work incentives induce
workers to use their skills but make life difficult for managers
Organizational characteristics and management
styles vary dramatically both across and within sectors, which leads to huge
variation in job design and complexity. Complex jobs pose a challenge for
management and workers; an incentive structure aimed at unlocking workers’
potential can effectively address this challenge. However, the heterogeneity
of job complexity and the inherent difficulty in devising a correct set of
incentives may result in misalignment between job demands and incentivized
behaviors, and in complaints by employers about the lack of skilled