ECN 340 Lecture 13: Lecture 13
23 May 2018
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Lecture 13: Why Your Boss is Overpaid
Incentives to Work Harder
• The new bosses of the Safelite Glass Corporation wanted to speed things up
• Productivity at Safelite soared under the new piece-rate system, with work per worker
increasing by nearly 50% (you get paid by the unit)
• Half of this effect was because workers tried harder
• The other half was because the fastest, most skilled workers made much more money
and stayed with the firm, while slow, clumsy workers, who weren’t making much
money, drifted away
• The quality of work also increased, and the number of botched jobs fell
• For most jobs, it is not so easy to measure performance and pay accordingly
• For example: You can’t check whether a FedEx courier is smiling at customers, even if
you can track the packages
• Such measuring problems make it very difficult for managers to assess worker
performance and what to pay them
• Sometimes there is just no way to tell the difference between a brilliant worker and a
lazy charlatan
• Mas and Moretti (2 economists) wanted to find out whether people work harder if
surrounded by productive colleagues; they studied the performance of checkout
counter workers
• Should checkout counter workers be put on a “piece-rate” system, as the workers at the
windshield replacement company discussed earlier?
• Difficult to use “piece-rate” system because there is often many variables at play that
are hard to measure (how can you measure the “friendliness” of the checkout counter
worker?)
• So bosses will rationally search for, pre-informal ways of rewarding their best staff,
rather than writing down a specific, objective measure of performance
• One solution is to turn office life into a “tournament”: the bosses pay employees
according to their relative performance compared to other employees they work with
• Workplace tournaments is a reason that work can be such a miserable experience.
Workers will figure out that there are two ways to win this game: either do a great job
or make sure your colleagues do a bad one
• Tournaments motivate backstabbing as well as dedication
• Tournament theory can also partially explain the high pay of CEO (chief executive
officers). CEO performance is hard to measure: it can be due to luck – also hard to
measure, if a company is doing well it can be due to various variables other than the
CEO. There is a side benefit: people will work very hard to get his position
• But one of the side benefits of tournaments is that the high CEO pay gets those below
him/her to work harder to get to the CEO’s position
• The stock options given to CEOs contributes to their very high pay, but shareholders do
not particularly care because it is only a very small amount from each
