After watching a pro-charter-school documentary put together by non-teachers with big money hiring a slick name-brand director, I watched a counter-documentary filmed by teachers who had evidently never cut a film before.

Teachers' unions, predictably, are the villain in the pro-charter-school movie. And teachers' unions oppose merit pay, which everyone knows without looking is a logical, reasonable, basically unassailable concept. Better pay for better work is fairer and more motivating. Period. Think about Charlie Munger's FedEx example– is there really more to say on this issue?

Turns out I had been so convinced by the obvious logical arguments against teachers' unions and for merit-pay, that I hadn't actually thought about the details or looked at any empirical evidence. Doing so raised questions that I think are relevant to managing people in any business.

There are multiple ways to spend more on your wage bill, with the purpose of improving labour output. What most of the teachers in the counter-Superman docu seem to repeat is that they want "support in the classroom". Each dollar spent on incentive pay, provided it didn't come from salary reduction, could be spent instead on hiring another teacher or support staff, because managing thirty 9-year-olds at once is hard, let alone trying to get them to learn something. (Other studies show that removing disruptive children from the classroom is more effective than peer tutoring, reduced class size, and even motivation. But someone needs to attend to the disruptive children since they don't disappear and remit includes teaching them as well. In the case of trading any dollar allocated to incentive pay could have gone towards support staff as well.

Each dollar spent on incentive pay could also be spent on better "equipment": whether that be keeping up decaying infrastructure, paying for a science lab, or buying new textbooks. Likewise a trader might perform better with better computers or in a nicer office–that's an empirical question.

There are more questions with how exactly to design an incentive scheme. In Charlie Munger's example he doesn't want to encourage the workers to move so fast that they break the packages. In trading we don't want to encourage taking on positions that look good at year's end but blow up after the trader has collected his cash and moved on to another firm.

More questions. How much of pay is variable and how much is guaranteed? Studies show that incentive pay for teachers is ineffective unless it (a) represents a significant wage bump [like at least 50% extra] and (b) what the teacher has to do to earn the reward is quite clear.

Who gets the incentive pay? Some studies found that merit pay for principals was more effective than merit pay for individual teachers. Likewise we have to decide how risk-managers should be incentivized relative to individual decision-makers.

Bonuses may increase motivation, but lack of motivation might not always be your biggest bottleneck. Try to keep thirty 9-year-olds in check at once, or keep details of thirty trading desks in your head at once, and it may simply be too hard no matter how much you try.

Thus we return to the really hard questions of organizational design. How do you as a manager design a structure to make your people as effective as possible?





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1 Comment so far

  1. Your Price is zero on August 5, 2014 5:16 pm

    Imagine if Victor Niederhoffer got paid on merit. The guy would never have made a single dollar in his life. What a fraud.


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