For Reformers: An Important Paper on Worker Compensation and Incentives

7214510228_fa7685186d_nI’ve written before that education reformers often have an unfortunate lack of perspective about the way the world works outside of education. This means that reformers often unjustifiably assume – implicitly or explicitly – that their proposed changes would make education more like other sectors. This assumption, in turn, makes reformers’ proposals seem more intuitive and leads reformers to underestimate their potential disadvantages.

As a result, if I had to pick one study that I think all would-be education reformers should read, it would be a paper that I once found via Bryan Caplan. It’s an old paper – from 1988 – and it’s not even about education. Rather, it’s an examination of why most companies don’t use the sorts of compensation and incentive schemes that a simplistic understanding of economics might imply they do or should. Here’s the abstract:

A thorough understanding of internal incentive structures is critical to developing a viable theory of the firm, since these incentives determine to a large extent how individuals inside an organization behave. Many common features of organizational incentive systems are not easily explained by traditional economic theory-including egalitarian pay systems in which compensation is largely independent of performance, the overwhelming use of promotion-based incentive systems, the absence of up-front fees for jobs and effective bonding contracts, and the general reluctance of employers to fire, penalize, or give poor performance evaluations to employees. Typical explanations for these practices offered by behaviorists and practitioners are distinctly uneconomic-focusing on notions such as fairness, equity, morale, trust, social responsibility, and culture. The challenge to economists is to provide viable economic explanations for these practices or to integrate these alternative notions into the traditional economic model.

The authors then proceed to examine all of the ways and reasons that most businesses tend not to implement the sorts of incentive and compensation schemes that reformers typically recommend for schools and teachers.

Are you shocked that teachers are not paid differentially based on their performance? Perhaps you shouldn’t be:

Evidence from research on compensation plans indicates that explicit financial rewards in the form of transitory performance-based bonuses seldom account for an important part of a worker’s compensation.. Medoff and Abraham …examine the pay of managerial and professional employees in two large manufacturing firms and find little differences in earnings resulting from superior performance…

Lawler cites six separate studies of the relationship between pay and performance, and finds that “their evidence indicates that pay is not very closely related to performance in many organizations that claim to have merit increase salary systems. . . . It is particularly surprising that pay does not seem to be related to performance at the managerial level.”

Are you surprised at how few teachers are rated “unsatisfactory” by their supervisors? Again, perhaps you shouldn’t be:

[S]upervisors tend to assign uniform performance ratings and tend not to assign poor performance ratings. Only .2 percent of the 4,788 employees in Company A received the lowest rating; 94.5 percent were rated “Good or “Outstanding”. None of the 2,841 Company B employees received an “Unacceptable” or “Minimum Acceptable” rating, and only 1.2 percent received a rating of “Satisfactory”; 95 percent of the Company B employees are rated “Good” or “Superior”.

Does it seem odd to you that teachers are granted tenure? Perhaps you are beginning to sense a pattern:

Tenure systems appear to prevail in situations where human capital, creativity and an unstructured environment are particularly important in the production process, and where long lags between actions and the observation of outcomes make performance measurement and evaluation difficult…

Tenure, partnership, and up-or-out systems tend to be associated with relatively small organizations with few hierarchical levels.

Over and over again, this paper demonstrates that many of the existing teacher incentive and compensation systems that reformers often object to are in fact not that unusual in other fields. Since reformers seem not to be aware of this – and at times actively assume otherwise – they frequently fail to consider the reasons such systems are popular in other fields.

Fortunately, this paper explores many of those reasons, which goes a long way toward making it essential reading for anybody interested in education policy.

Of course, none of this is to say that any particular aspect of today’s education system couldn’t be usefully improved. Understanding how the world can be improved, however, requires first understanding why it is the way it is.

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One Comment

  1. David B. Cohen
    Posted April 16, 2014 at 10:44 PM | Permalink

    Great post – thank you for sharing. I’ve tried to take a similar approach in several blog posts, looking at what business/management leaders really say when they aren’t talking about schools, and then considering what it would mean for schools if we did apply similar thinking: http://accomplishedcaliforniateachers.wordpress.com/tag/business/

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