Off to the Pay Races

Although it may be hard to discern at the CEO level, higher pay equals higher performance. Two academics went to the track to suss out why.
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Although it may be hard to discern at the CEO level, higher pay equals higher performance. Two academics went to the track to suss out why.

I thought I had landed accidentally on an article from the British journal Animal Behaviour, a publication where you find studies called "'The Bone is Mine': Affective and Referential Aspects of Dog Growls," next to "Leadership and Social Information Use in Human Crowds."

Actually, I was reading the January issue of the Journal of Labor Economics and an article invitingly titled, "The Thrill of Victory: Measuring the Incentive to Win." The authors, Bentley Coffey, adjunct assistant professor, and Michael T. Maloney, professor emeritus at Clemson University, compared data on racing thoroughbred horses and greyhounds as a way to gain insight into whether financial incentives play a role in getting employees to work hard.

The authors discovered that jockeys pushed the horses harder when the purse was bigger but the dogs ran hard and couldn't have cared less about the money. That confirmed to Coffey and Maloney that, elsewhere in the working world, humans are more likely to toil through the weekend and skip the concert if they think it will get them a promotion and raise or bonus.

Had the horses and dogs run the same without regard to the payoff, then employer "performance pay schemes are a waste," Coffey and Maloney write. And that has important policy implications, they say, because employers across the land then would need only to match an unfilled job with a talented, ambitious individual knowing he or she is likely to work hard anyway, even if there is no cash in it.

In other words, the typical wage hierarchy where everybody earns more as you go up the organizational chart, as well as bonus pools and other types of incentive compensation, could be unnecessary. And that could have blown to bits the logic governing the way most of us are paid.

To this world of cross-species comparisons Coffey and Maloney have brought a sophisticated mathematical analysis. Their approach has roots in the neoclassical economic vision, which has reshaped the field as a science about the behavior of rational agents, responding rationally to incentives, signals and constraints, in a complete universe or system. As a subject of study, sports provide relatively clean examples and rich data that are rarely ever available from the business world.

In one well-known study of this type, other authors showed that race walkers gear their effort to the expected payoff, walking harder when there are fewer contestants and the chances of winning are higher.

Coffey and Maloney extended a similar style of academic resourcefulness to four-legged competitors. They sought to refine a well-established but controversial economic explanation for why companies pay substantially more to higher-ranked employees even when what the higher-ranked employees produce is hard to measure.

Known as Tournament Theory, the explanation has been a foundation stone in the subdiscipline referred to as personnel economics, a field that was developed partly by one of the labor economics journal's founding editors, Edward Lazear.

"Everyone agrees that as pay goes up so does performance," Coffey and Maloney write, but so far no one has untangled three competing effects possible in incentive-based performance.

Is the extra effort a monetary cost-benefit effect, where participants measure the marginal cost of winning, or the effort needed to produce victory, against the payoff?

Or is it the ability effect, where higher rewards draw the interest of better-qualified participants?

Or is it still another effect, the thrill of victory, where participants work to get to the top just because of a tendency toward "outperforming the next fellow?" as Coffey and Maloney write.

Since it's hard to get data on cubicle dwellers and factory foremen, the authors built a complex model to represent differing race conditions and fed it information from races at the Orange Park Kennel Club in Jacksonville, Fla., for 2006 gathered from www. The data covered 1,037 races run on 77 days with an average length of 550 yards.

They also gathered data on 712 thoroughbred horse races at Churchill Downs in Louisville in 1994 covering 566 races where the normal distance is 6.5 furlongs.

By scrutinizing the speeds, and in the case of the horses, the distances between the competitors, Coffey and Maloney found that the jockeys pushed the horses harder when looking forward to bigger prize winnings. That said something, especially when you are risking injury to a costly investment-a thoroughbred horse.

Still, the track is a long way from the office or factory.

Personnel economics recognizes that in the modern economy, most job mobility occurs within an organization according to its rules and that the factors that determine who makes what differ from those that face job seekers in an arms-distance impersonal labor market that runs according conventional pricing, allocation and training decisions.

Tournament theory added a new dimension when Lazear and his co-author, Sherwin Rosen, in 1981 published an article in the Journal of Political Economy called "Rank Order Tournaments as Optimum Labor Contracts." It deals with the relation between compensation and incentives.

By paying workers based on rank order, rather than spending time and money determining what they actually produce, employers avoid the troublesome task of actually measuring the value of what higher-paid employees do, Lazear and Rosen showed. In showing the advantages of pay schemes based on hierarchy rather than output, the theory also provided a way of understanding, and a possible justification for, outlandishly large executive salaries.

Critics such as Alfie Kohn, backed by other studies, argued that incentive pay schemes are based on behaviorist nonsense that confuses intrinsic motivation, such as enjoyment in doing the work itself, with extrinsic motivation, where the job is a means to an end, a claim on a prize or meant to avoid reprimand or firing.

Another critic, economist Albert Rees, noted that few employees ever get or hope to get one of the top jobs, tournaments take place in very limited time frames and losers in companies can't just sign up for the next tournament.

Yet blaming tournament theory for huge executive compensation strikes me as an exaggeration.

While the tournament literature may seem at face value a justification of high executive pay and unequal distribution of income, it's also subversive of basic neoclassical economic theory, which says workers are paid their "marginal product," the amount of labor needed for one additional unit of production, with no room for negotiations, motivation or consideration of morale. In that sense, it opens the door to a sociological analysis of the workplace.

"Whatever its implications for executive pay, I welcome it as a movement away from the unrealistic wage theories presented in some college economic textbooks," one economist told me.

Maloney says there's a trade-off when companies choose to give executives what he describes as "super-levered bonuses" based on incentives. "They're either going to make whatever goal is set for them or they're not going to get much at all," he says. "And when you make an incentive contract, the average amount the employee earns has to be a lot or they won't take the job."

The tournament theory "shouldn't get knocked on this," he adds. Highly paid executives are "getting an enormous amount of money because they are taking a risk of not making much."

Scholars respond to incentives, too, such as layering an extra level of meaning on a study for the possible reward of getting a paper published. Perhaps in this case there was a little anthropomorphizing of Lassie by portraying the dogs' behavior as pure, uncorrupted competitive spirit, the "thrill of victory."

Animal rights advocates have claimed that greyhounds bred specifically for the track must run well in their first few races or they may be euthanized or given away. So the greyhound may be responding to a genetic memory that tells it to run to avoid slaughter. A hard-running dog may also anticipate receiving praise from owners or handlers, extra helpings of food or even eventually congratulatory mating in the form of stud service after retirement.

Thoroughbreds provide other problems if you are going to consider the horse-jockey team a rational actor in an economic universe. A jockey can whip and exhort his or her mount to run faster, but horses, despite their remarkable affiliation with humans as domesticated animals, can't always muster the leg-power or emotional states that bring out top performance.

Maloney had already thought this through when I asked him about it.

"We thought that horses and dogs were pretty much the same in pre-race conditioning and incentives that they can imagine in the states of consciousness they have, including the incentive for the dog to do well because they would be treated better and had seen their friends leave the kennel and never come back," he says.

Those same types of factors exist for humans, too, Maloney adds. Only with people, they're called working conditions.

I'm still stuck on the idea that it's too expensive to figure out if the boss deserves the big salary, and overpaying the boss keeps everybody else running hard.

Just seems like another trick to make us work our tails off.

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