Archive for the ‘piece-rate incentive system’ Category

Companies are paying people to lie

December 19, 2007

Companies are paying people to lie.

Companies offer bonuses to executives and workers when they surpass a given target. Companies do this to push executives and workers to meet goals that seem unattainable. But the real effect of these kinds of targets is to encourage people to be deceptive, i.e. to lie. Below are a couple examples to illustrate this.

Goldbricking in a Machine Shop

Lathe operators in a certain machine shop are paid according to what’s called a “piece-rate incentive system.” They start out with a rate per piece. Once they hit a certain target, their rate per piece increases. Once they get over a second hurtle the rate per piece increases again.

The problem the workers faced was that if they worked too hard or too fast, the hurtle would be raised. So, the workers restricted their output and worked more slowly than they might have.

Instead of trying to be as productive as possible, they spent their time figuring out how to manipulate the rate per piece so they could make as much money as possible.

Management Lowballing

The phenomena we just saw with the lathe operators is also at work with managers.

Tell a manager that he will get a bonus when budget and performance targets are met and two things are sure to happen:

  1. Managers will set targets that are easily reachable by lowballing their estimates for the year ahead and poor-mouthing their prospects.
  2. Once targets are set they will do everything they can to meet them.

Recap

The company does not know the real productivity of the lathe operators.

The company does not know what the real performance is of its managers.

Companies need good information to plan for the future, but they are not getting it because they are paying their employees to lie.

– Extracted from The Wisdom of Crowds by James Suroweicki


Follow

Get every new post delivered to your Inbox.

Join 31 other followers