Veganomics

I read an interesting chapter on managerial compensation in The Logic of Life by Tim Harford.

He posits that tournament theory can throw some light on why managers get paid so much. In the absence of information on the individual effort and performance, one way of incentivising employees to work harder is to simply raise the wages of their managers. Consider a CEO who gets paid $400m a year. Even if the value of his (or her) own decisions and contributions to the organisation are worth no where near $400m, the fact that (s)he gets paid so much may incentivise subordinates to work harder in the hope that they will promoted to CEO one day. When the value of the extra effort of each employee is considered, it may make rational sense for a firm to pay its managers such ludicrously high wages.

I wonder whether most CEOs would agree with this or whether they think they are worth the amount of money they are paid.

Yesterday, I attended a billiant lecture on aid by Justin Sandefor, a development economist at Oxford University.

He made reference to a study conducted on Israeli daycare centres that was made popular by Freakanomics:

“Imagine for a moment that you are the manager of a day-care center. You have a clearly stated policy that children are supposed to be picked up by 4 p.m. But very often parents are late. The result: at day’s end, you have some anxious children and at least one teacher who must wait around for the parents to arrive. What to do?

A pair of economists who heard of this dilemma — it turned out to be a rather common one — offered a solution: fine the tardy parents. Why, after all, should the day-care center take care of these kids for free?

The economists decided to test their solution by conducting a study of ten day-care centers in Haifa, Israel. The study lasted twenty weeks, but the fine was not introduced immediately. For the first four weeks, the economists simply kept track of the number of parents who came late; there were, on average, eight late pickups per week per day-care center. In the fifth week, the fine was enacted. It was announced that any parent arriving more than ten minutes late would pay $3 per child for each incident. The fee would be added to the parents’ monthly bill, which was roughly $380.

After the fine was enacted, the number of late pickups promptly went … up. Before long there were twenty late pickups per week, more than double the original average. The incentive had plainly backfired.“

Once they removed the fine, parents continued to pick up their children late.

Even though I think that fines can act as brilliant instruments to influence behaviour, a poor fine can have seriously negative effects. Before the fines, parents made an effort to pick up their children as they felt bad. Paying the fine removed this bad feeling, and this stayed after the fines had been removed….