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Overpaid, underworked and in charge

First published, BBC Online.

It should go without saying – but never does – that your boss is overpaid and underworked, while you and your colleagues toil long hours for peanuts.

But beyond the fact that life is cruel, is there a rational explanation for this?

An economist called Ed Lazear has one. He noticed that in a sporting tournament – say, Wimbledon – players are paid for winning rather than for trying.

But they try anyway.

Lazear thinks the same is true of office life. Nobody thinks that Roger Federer’s cheque at Wimbledon is supposed to be his payment for turning up at the next tennis match.

They realise it’s a reward for his past victories and a motivation for every other player to go away and practise, so that next year they will play better.

Your boss’s easy lifestyle and “fat cat” salary are just the same.

They are not supposed to be a motivation for him, they are supposed to be a motivation for you and me and all the other workers who are struggling to get to the top of the heap.

In fact, the more egregious his salary the more hard work it should squeeze out of everyone else who wants it.

Lazear and his fellow economists call this “tournament theory”.

That explains a lot about why office politics can be so endemic – one way for you to win the tournament is for your colleague to lose.

Using a tournament to encourage hard work can backfire if employees decide it’s easier to sabotage each other than try to shine themselves.

But why do companies have to reward their workers in such a strange way? Why not simply pay people according to their objective performance rather than set them against each other?

Unfortunately, it’s not that simple.

It will always be easier to say that Jill is a better worker than Jack than it will be to give some objective performance measure for either of them.

Companies can rely on apparent measures of performance, like profit-sharing or stock options, but profits and share prices will bounce up and down in response to recessions, bad weather, terrorist threats or unexpected competition.

They are risky for workers without really encouraging them to work harder. A tournament makes better sense.

The real problem is that it’s tough for a company to work out who’s talented and who’s not, who’s hard-working and who is a layabout.

The boss is in the same position as the buyer of a second-hand car. The car might look good on the garage forecourt, and the eager young salesman might seem good in an interview or a performance review, but what’s really the truth?

That isn’t just a problem for the boss. It’s a problem for the workers too.

If you’re talented and hardworking, how can you prove it so that you can get a job or get a pay rise? It can be tough to get a foot through the door at all.

Economists argue that one way forward is to do something that a lazy person simply wouldn’t or couldn’t do – a degree in philosophy, for instance.

After all, people with philosophy degrees generally make more money than people with no degrees at all.

Can that really be because philosophy degrees are great training? Surely not.

It’s all about proving yourself. Philosophy is hard work and requires you to be brainy. And getting that philosophy degree isn’t about learning to be productive, it’s about proving that you already are.

This view of education – called “signalling theory” – was developed by an economist called Michael Spence, who eventually shared the Nobel prize in economics.

Spence’s first degree? Philosophy.

1st of September, 2006Other Writing • Comments off