The best use of money as a motivator is to pay people enough to take the issue of money off the table, so that people can focus on the work rather than on the cash.
The best use of money as a motivator can be to pay people enough to take the issue off the table.
After more than 200 years of sharing a common language, the United States and Great Britain now share a common predicament.
As the Prime Minister, David Cameron, has boldly announced and President Obama, alas, has barely acknowledged, we are living in an age of austerity.
But our stringent times are also bringing in an era of pragmatism. Governments and businesses alike are trying to slip the surly bonds of ideology and forge solutions the core virtue of which is that they deliver results.
Consider education. On both the eastern and western shores of the Atlantic Ocean, we’ve long treated schoolteachers as public servants who should be insulated from the briny waves of market forces. But now, as the world’s economic centre of gravity shifts eastward, and as British and American students underperform their Asian counterparts, leaders are casting aside this orthodoxy for a new approach.
Instead of compensating teachers like government mandarins, the reasoning goes – let’s treat them like entrepreneurs. And so, especially in the US, the Left and the Right, in a rare moment of comity, have pushed to link teacher pay to student performance.
You can almost feel the fresh breeze of new thinking displace the stagnant air of old dogma. The solution is sensible, practical, and attuned to the times. There’s just one problem with it – the early evidence shows it doesn’t work. And the results (or lack thereof) yield an important lesson for leaders in every realm – including business.
Earlier this month, Harvard University economist Roland Fryer released an impressive research paper that examined the effects of a large pay-for-performance programme in more than 200 public schools in New York city. For three years, teachers in schools that reached certain performance targets could earn an annual bonus of $3,000 (about £1,850).
Fryer looked at how students in those schools fared on standardised tests – and pored over the data on student absences and graduation rates. He also analysed the impact on teachers – in particular, whether those offered a bonus took off fewer days or stayed in the profession longer.
“Providing incentives to teachers . . . did not increase student achievement in any statistically significant way,” he wrote. Indeed, under the incentive plans, student test scores actually dropped. The impact on graduation rates and other measures of student behaviour was “negligible”, the impact on teacher absences and retention was essentially zero.
Fryer is the architect of a few such pay-for-performance schemes in the US, but as he summarised: “I find no evidence that teacher incentives increase student performance, attendance, or graduation, nor do I find any evidence that the incentives change student or teacher behaviour. If anything, teacher incentives may decrease student achievement, especially in larger schools.”
If Fryer’s findings were the only assessment of these new pay-for-performance measures, we could let the jury deliberate longer before delivering a verdict. But his work follows on the heels of a similarly comprehensive study a few months ago.
In that work, researchers at Vanderbilt University’s National Center on Performance Incentives looked at an equally pragmatic incentive plan in Nashville, Tennessee, a large city in the southern US.
For three years, several hundred maths teachers in grades 5 to 8 (students between the ages of 10 and 14) were randomly assigned to one of two groups. The first, the control group, received their regular salaries. The second also received their regular salaries – but could earn as much as an additional $15,000 (about £9,300) if their students’ performance on statewide tests and other measures improved.
Not much. The students taught by incentivised teachers did no better or no worse than students taught by regular salaried teachers.
The incentive scheme “did not set off significant negative reactions of the kind that have attended the introduction of merit pay elsewhere”, the researchers wrote. “But neither did it yield consistent and lasting gains in test scores. It simply did not do much of anything.”
Of course, two social science studies, rigorous though they are, can’t represent the final word on such a complex issue. But these findings are consistent with 50 years of behavioural science that shows that contingent pay schemes – if you do this, then you get that – are effective for simple, routine work, but not very effective at all for complex, creative, conceptual work.
So what does this mean for corporate managers and government officials seeking to coax high performance from employees in the post-recession years?
The answer might require us to plumb research conducted way back in the Thatcher-Reagan era. In the mid-1980s, George Akerlof, who later won the Nobel Prize in economics, and his wife, Janet Yellen, a fellow economist who now serves on the Federal Reserve’s Board of Governors, discovered something peculiar about a group of employers they were studying in Northern California.
Instead of paying employees the wages that supply and demand would have predicted, these companies gave their workers a little more. It wasn’t because the leadership was selfless or the mangers were stupid. It was because they were savvy.
Paying great people a little more than the market demands, Akerlof and Yellen found, helped attract better talent, reduce turnover, and boost productivity and morale. In fact, the firms making the irrational and seemingly frivolous choice to “overpay” their employees, rather than construct elaborate incentives, outperformed their competitors.
Policy makers and business leaders take note: money matters. But often the best use of money as a motivator is to pay people enough to take the issue of money off the table – so that people can focus on the work rather than on the cash.
This era of pragmatism is also turning out to be an era of paradox. Perhaps the best solution for progress in our age of austerity is to be a little less austere.
Daniel H Pink