Piece rates are out of fashion but incentive contracts for top executives are in. Perhaps we will soon discover that the problems caused by piece rates also dog share option schemes.
In the bad old days, weekly paid workers in manufacturing industry were often employed on piece rates. Output targets were set, and you were rewarded for meeting or exceeding them. The system did not work well. People paid in this way rarely showed much commitment to the firm or the product – indeed the underlying assumption was that they would not have any such commitment, and the assumption proved self-fulfilling. And the incentive was to meet the target, not to satisfy the customer. So you would rather kick a defective part into position than delay the production line.
And the business of setting and negotiating targets encouraged gamesmanship and role playing. It made sense to conceal how much you could do, rather than make suggestions for increasing productivity. The film I’m All Right, Jack was a hit because it was substantially true. Mr Pike was a fictional character. But Red Robbo, with a reputation built on negotiating piece rates, could bring Leyland to a halt and often did.
In the bad old days, salaried work was very different. You were expected to do the job for a fixed monthly sum, however hard the work proved to be and however long it took. Performance was relevant to salary only when it led to promotion. You did not imagine that you could negotiate your pay. A salaried job was a mark of status – it meant that you could be trusted to monitor your own performance. You tipped hotel porters, but not your doctor. If you sent the latter a bottle of whisky at Christmas, it was a genuine expression of gratitude, not as an incentive to keep you well. When the board of a bank or railway company occasionally voted a bonus for a senior manager, they only emphasised the difference in social standing between an executive and a director.
But the bad old days have gone. No progressive company today has piece rates for its low paid employees; their pay reflects grade and seniority. If there are bonuses, they are based on the performance of the company as a whole. Team working is preferred to assembly line production. Piece rates are for sweat shops.
But things have changed for the middle classes too. Many people in the City now expect to earn most of their remuneration from bonuses. Only the most old-fashioned of companies is without stock option and long term incentive schemes for its senior managers. Doctors, teachers and civil servants are all having to come to terms with performance related pay.
A strange inversion, this. Why has what is no longer sauce for the goose now sauce for the gander? The same consultants who once followed workers around the factory with stopwatches now specialise in incentive schemes for company executives.
Part of the explanation is that some of the truly awful jobs in society are now middle class rather than working class. The old theory was that employment on a car assembly line was so unrewarding in any but financial terms that the only way to persuade someone to do it was to remind them about the money throughout every minute of their day. The distance between inserting the rivet and seeing the wheels of the car go round was just too great. We know now that the right answer to this dilemma is to reshape the job so that everyone who is engaged in assembly feels associated with the final product. But we cannot do this for the Eurobond trader. The connection between his activities and the wheels of industry and commerce is remote, if indeed it exists at all. There is nothing for it but to stress the money.
But this does not apply to senior executives. Running a large company is an important job and, for those who do it effectively, an immensely satisfying one. If a firm tells you it needs performance bonuses to stop its managing director from shirking on the job, you know that it is a bad company with the wrong chief executive. The notion that enormous bonuses are necessary to motivate such people is insulting to them and even more insulting to ordinary people who work hard and long for these firms without any prospect of equivalent remuneration. And the same is true of doctors, teachers, and civil servants. Anyone in these professions who does not feel well rewarded by a job well done is not the sort of person who should be doing it.
These explanations offered for these performance related bonuses are subterfuges. Those who fix executive remuneration are sometimes asked why it is necessary to pay someone the best part of £1m per year to do the job. They can respond that earning £1m depends on meeting demanding performance targets. You will notice that this is not an answer to the question, but it delays and obfuscates.
And the rationale for performance related pay for civil servants and academics has equally nothing to do with the need to reward performance. Performance has always been rewarded, by earnestly sought promotions. It is to make it easier to pay more to tax inspectors and accountancy professors, who are in demand in the better paying private sector, without paying more to benefit clerks and philosophy teachers, who are not. There is no morality, equity or justice in this; but there is a rule of the market that says this is what you must do if you want your taxes collected and you think that future generations should know their profit and loss account from their balance sheet.
But when we have cut through the humbug, we need to remind ourselves why piece work went out of fashion for low paid employees. It eroded commitment to the organisation; it encouraged people to focus on targets rather than broader based, and more relevant, objectives; it gave them incentives to promote low expectations about what might be achieved; and it absorbed time and generated acrimony in increasingly fraught negotiations. Maybe some of these things apply to performance related pay for the salaried also.
