The more training team members are given in cooperation, the larger the teams can be.. A question that all too often undercuts the value of teams is, “How are the workers to be paid?” If
Trang 1In addition, we suggest that since people who are alike tend to cooperate, the
more alike the members, the larger the team can be The more training team members are given in cooperation, the larger the teams can be Training, in other words, can pay not
only because it makes workers more productive, given how much the workers know how
to do, but also because it can reduce the added overhead of a larger number of smaller
departments
However, a lot depends on the type of training given workers Apparently,
economists, using their maximizing models (and the firmly held belief that everyone will
shirk when they can), are inclined to play whatever margins are available to their own
personal advantage, or to shirk when feasible, to a degree not true of other
professionals.51 As a consequence, it probably follows that the more economists (and
other people with similar conceptual leanings) employed, the smaller the team can be
Although we may never have intended it, we must fear that the people who read this book may be less disposed to cooperate than they were before they picked it up
The more workers are imbued with a corporate culture and accept the firm’s
goals, the larger the team can be The expenditures by corporate leaders trying to define the firm’s purpose can be self-financing, given that the resulting larger departments can
release financial and real resources
The more detectable or measurable are the outputs of individual team members by other team members, the larger the team can be Firms, thereby, have an economic
interest in developing ways to make work, or what is produced, objective Finally, the
greater the importance of quality, the more important team production should be, and the smaller teams will tend to be
No matter how it is done, the size of the teams within a firm can affect the overall size of the firm Firms with teams that are “too large” or “too small” can have
unnecessarily high cost structures that can restrict the firms’ market shares and overall
size, as well as the incomes of the workers and owners
But recognizing that teams can add to firm output is only half the struggle to
achieve greater output by getting workers to perform as they should A question that all
too often undercuts the value of teams is, “How are the workers to be paid?” If workers are rewarded only for the output of the team, then individual workers once again have
incentives to “free ride” on the work of others (to the extent that they can get away with
it, given the size of the team), which can be realized in not only slack work, but also
absenteeism If team members are rewarded exclusively for their own individual
contributions, then the incentive is reduced for actual teamwork
51
Researchers have found that on single -play experimental games designed to test the tendency of people
to “free ride” on the group’s efforts, not everyone contributed to the group’s output However, they also found that the members produced 40 to 60 percent of the “optimal output” of the public good, with the exception of only one notable group, graduate students in economics These graduate students provided only 20 percent of the optimal output See Gerald Marwell and Ruth Ames, “Economists Free Ride, Does Anyone Else?” Journal of Public Economics, vol 15 (1981), pp 295-310
Trang 2Generally managers effectively “punt” on compensation issues, not knowing
exactly how to structure rewards, by offering compensation that is based partly on team
output and partly on individual contributions to the team Team output is generally the
easier of the two compensation variables to measure, given that the teams are organized
along functional lines, with some measurable objective in mind Individual contributions
are often determined partially by peer evaluation, given that team members are the ones
who have localized knowledge of who is contributing how much to team output But
here again, the compensation problem is not completely solved Team members can
reason that how they work and how they and their cohorts are evaluated can affect their slice of the compensation pie The greater the evaluation of others, the lower their own
evaluation, a consideration that can lead team members to underrate the work of other
team members The result can be team discord, as has been the experience at jean maker Levi-Strauss where supervisors reportedly spend a nontrivial amount of time refereeing
team-member conflicts To ameliorate (but not totally quell) the discord, Levi-Strauss
has resorted to giving employees training in group dynamics and methods of getting
along.52
Motivating Team Members
One of the questions our conceptual discussion cannot answer totally satisfactorily is,
“How can managers best motivate workers to contribute to team output?” There are four identifiable pay methods worth considering:
1 The workers can simply share in the revenues generated by the team (or firm)
We can call this reward system revenue sharing The gain to each worker is
the added revenue received minus the cost to the worker of the added effort expended Under this method reward, each worker has maximum incentive to free ride, especially when the “team” is large
2 The workers can be assigned target production or revenue levels and be given
what are called forcing contracts, or a guarantee of one high wage level
(significantly above their market wage) if the target is achieved and another,
lower (penalty) wage if the target is not achieved Under this system, each
worker suffers a personal income loss from the failure of the team to work
effectively to meet the target
3 The workers can also be given an opportunity to share in the team or firm
profits Profit sharing (or sometimes called “gainsharing”) is, basically,
another form of a forcing contract, since the worker will get one income if the firm makes a profit (above some target level) and a lower income if the profit (above a target level) is zero
4 The workers within different teams can also be rewarded according to how
well they do relative to other teams They can be asked to participate in
tournaments, in which the members of the “wining team” are given higher
52
As reported in R Mitchell, “Managing by Values,” Business Week, August 1, 1994, p 50
Trang 3incomes and, very likely, higher rates of pay by the hour or month than
the members of other teams We say “very likely” because the winning team members may work harder, longer, and smarter in order to win the tournament
“prize.” Hence, the “winner’” pay per hour (or any other unit of time) could
be lower than the “losers.”53
All of the pay systems may have a positive impact on worker input and, as a
consequence, on worker output For example, a number of studies reveal that profit
sharing and worker stock ownership plans do seem to have an impact on worker
productivity.54 One study of 52 firms in the engineering industry in the United Kingdom
(40 percent of which had some form of profit-sharing plans and the rest did not) found
that profit sharing could add between 3 and 8 percent to firm productivity.55 And it has
also been shown that the more “participatory” the decision-making process, the more the information-sharing the communication process, the more flexible the job assignment,
and the greater the extent of profit sharing, the greater worker performance relative to
more traditional organizational structures.56 But the question that has all too infrequently
been addressed is which method of rewarding workers and their teams is more effective
in overcoming shirking and causing workers to apply themselves?
One of the more interesting studies that addresses that question uses an
experimental/laboratory approach to develop a tentative assessment of the absolute and
relative value of the different pay methods on worker effort Experimental economists
Haig Nalbantian and Andrew Schotter used two groups of six university economics
students in a highly stylized experiment in which the students’ pay for their participation
53
We should not be surprised if the pay rates of the winning and losing teams are closer together than their
incomes We doubt, however, a pay system that resulted in the “winners” having a lower rate of pay than
the “losers” would for long have the desired incentive impact, given that the higher income must also be discounted by the probability of any team winning.” If the winners’ pay rate were not higher than the losers’, we would expect the winners to curb their effort
54
See Felix FitzRoy and Kornelius Kraft, “Profitability and Profit-Sharing,” Journal of Industrial
Economics, vol 35 (no 2) December 1986, pp 113-130; Bion B Howard and Peter O Dietz, A Study of the Financial Significance of Profit Sharing (Chicago: Council of Profit Sharing Industries, 1969); Bertram
L Metzger, Profit Sharing in 38 Large Companies, I & II (Evanston, Ill.: Profit Sharing Research
Foundation, 1975); Bertram L Metzger and Jerome A Colletti, Does Profit Sharing Pay? (Evanston, Ill.: Profit Sharing Research Foundation, 1975); John L Wagner, Paul A Rubin, and Thomas J Callahan,
“Incentive Payment and Non-Managerial Productivity: An Interrupted Time Series Analysis of Magnitude and Trend,” Organizational Behavior and Human Decision Processes, vol 42 (no 1), August 1988, pp 47-74; Martin L Weisman and Douglas L Kruse, “Profit Sharing and Productivity,” in Alan S Blinder, ed., Paying for Productivity: A Look at the Evidence (Washington, D.C.: Brookings Institution, 1990), pp 95-140: and U.S Department of Labor, High Performance Work Practices and Firm Performance
(Washington, D.C.: U.S Government Printing Office, 1993)
55
John Cable and Nicolas Wilson, “Profit-Sharing and Productivity: An Analysis of UK Engineering Firms,” Economic Journal, vol 99 (June 1989), pp 366-375
56
See Mark Husled, “The Impact of Human Resource Management Practices on Turnover, Productivity and Corporate Financial Performance,” Academy of Management Journal, vol 38 (no 2), June 1995, pp 635-672; and Casey Ichniowski, Kathryn Shaw, and Giovanna Prennushi, The Effects of Human Resource Practices on Productivity (Cambridge, Mass.: National Bureau of Economic Research, working paper no
5333, 1996)
Trang 4in the experiment would be determined by how “profitable” their respective teams were
in achieving maximum “output.”57
The students did their “work” on computers that were isolated from one another The students indicated how much “work” they would do in the 25 rounds of the
experiment by selecting a number from 0 to 100 that had a cost tied to it, and each higher number had a higher cost to the student, just as rising effort tends to impose an escalating cost on workers The students in each of the two teams always knew two pieces of
important information, how much they “worked” (or the number they submitted) in each
round and how much the “team” as a total “worked.” They did not know the individual
“effort levels” of the other students
Granted, there is much to be desired about the experiment, which the authors fully conceded The experimental setting did not reflect the full complexity of the typical
workplace Direct communication among workers can have an important impact on the
effort levels of individual workers, but the complexity of the workplace is why it is so
difficult to determine how pay systems affect worker performance, especially relative to
alternative compensation schemes
Nonetheless, the researchers were able to draw conclusions that generally confirm expectations from the theory at the heart of this book They found that when the revenue-sharing method of pay was employed, the median “effort level” for each of the two teams started at a mere 30 (with a maximum effort level of 100), but since the students were
then told how little effort other team members were expending in total, the students
began to cut their own effort in each of the successive rounds The median effort level in both teams trended downward until the 25th round when the median effort level was
under 13 That finding caused the researchers to assert: “Shirking happens.”58 They
were also able to deduce that the history of the team performance matters: the higher the team performance at the start, the greater the team performance thereafter (although the
effort level might be declining over the rounds, it would still be higher at identified
rounds, the higher the starting effort level)
Nalbantian and Schotter found that forcing contracts and profit sharing could
increase the initial level of effort to 40 or above, a third higher than the initial effort level
under revenue sharing, but still the effort level under forcing contracts and profit sharing
trended downward with succeeding rounds of the experiment Nalbantian and Schotter
also found that the tournaments that were tried, which forced the team members to think competitively, had median initial effort levels on par with the initial effort levels
observed under forcing contracts However, the effort level tended to increase in the first few round and then held more or less constant through the rest of the 25 rounds At the
end of the 25 rounds, the teams had a median effort level of 40 to 50, or up to four times the ending effort level under the revenue-sharing incentive system Understandably, the
authors conclude that “a little competition goes a very long, long way.”59
57
Haig R Nalbantian and Andrew Schotter, “Productivity Under Group Incentives: An Experimental Study,” American Economic Review, vol 87 (no 3), June 1997, pp 314-341
58
Ibid., p 315
59
Ibid
Trang 5Finally, the authors conclude that monitoring works, which is no surprise, but the extent to which monitoring hiked the effort level does grab the attention No monitoring
system works perfectly, so the authors evaluated how the teams would perform with a
competitive team pay system under two experimental conditions, one in which the
probability of team members being caught shirking was 70 percent of the time and one in which teams members being caught shirking was 30 percent of the time, with the penalty being stiff, loss of their “jobs.” The median effort for one team level started about at 75
(the predicted effort level from theory) and stayed there until the last round, at which
point the effort level fell markedly (a finding that will be understandable from our
discussion of the “last-period problem” in an earlier chapter) The median effort level for the other team started at about 50, rose quickly to 70, and stayed there through the rest of the rounds (with one very large drop in effort in the middle of the rounds)
When the probability of being caught shirking dropped to 30 percent, the effort
level of one team started at 70 and went up and down wildly between zero and 80 for the next twenty rounds, only to approach zero during the last five rounds The effort level of the other team started close to zero and stayed very close to zero for most of the
following rounds (reaching above 10 only twice)
Obviously, monitoring of team members can have a dramatic impact on team
performance, but as in all matters, the cost of the monitoring system can be high The
researchers have not yet been able to say, from the experimental evidence, whether the
improvement in team performance is worth the cost of the monitoring system that is
required However, managers can’t wait for the experimental findings They must find
ways of minimizing the monitoring costs One of the great cost-saving advantages of
teams, which is not reflected in the way the experiments were run, is that teamwork tends
to be self-monitoring, with each team member monitoring one other In the experiment,
the team members could not monitor and penalize each other When the experimental
work is extended, we would not be surprised if the effort level increased when the team
members are able to monitor and penalize each other
Should all firms adopt the competitive team approach? The evidence suggests a firm “yes.” But we hasten to add a caveat that managers of some firms must keep in
mind Greater effort to produce more output is desirable so long as it does not come with
a sacrifice in “quality” (or some other important dimension of production) Competitive
team production may be shunned in firms in industries like pharmaceuticals and banking
that can’t tolerate, because, for example, of liability problems, concessions in their
quality standards The competition in the tournaments drive up “output” but drive down
“quality.” Such firms would want to use reward systems that keep the competition under control and the quality standards up They would also want to rely on close monitoring,
and they could justify the cost, given the costs that they might suffer with defects This
leads to the obvious conclusion, the greater the cost of mistakes, the greater the cost that can be endured from relaxed competition and from monitoring
Trang 6Problems with Committees
Committees are special forms of teams that are the subject of much business abuse, both
in terms of the number of meetings held and in terms of what business people think of
most meetings Indeed, business people often chafe when the subject of committee
meetings is aired, “People talk too much, and too little is accomplished,” harried
businessmen and women often fret about committee meetings By the standards of
university faculty meetings, however, business people have nothing to complain about
Indeed, they can thank their lucky stars that they do not have to suffer many of the
meetings we’ve had to suffer throughout our academic careers Now, we have something
to complain about! Business people may talk a lot, but faculty members have made “hot air” an entitlement
Why are committee meetings so boring, as well as frequently unproductive? We suspect that the problem emerges partly because the people who call the meetings do not necessarily suffer the costs that are incurred We were once listening to a business
executive give a talk in which he crystallized his point, and ours, by asking the audience
for a show of hands in response to the question, “How many people in this room can sign
a purchase order for some piece of equipment worth $10,000 without having someone
else in the organization approve the purchase and cosign the order?” No more than a half dozen in the crowd of more than a hundred raised their hands He then asked, “How
many people in this room can organize a series of meetings of fifteen or twenty people
without having anyone approve the meetings?” The room was full of hands
The speaker then prodded those in the group, “Is there any difference?” Of
course, there is one obvious difference The purchase order involves money; the
meetings involve time But every business person (and professor) understands and
appreciates the old aphorism, “Time IS money.” Nevertheless, people everywhere all too
often seem to forget that truism when it comes to meetings which is understandable,
given that the costs of meetings are rarely computed, and when considered are
“externalized” (or imposed on others)
Again, we submit that the problem with boring meetings is the incentive structure
in the committees The person calling the meeting will, however, consider the question
of whether the meeting is worth his or her own time cost, apart from the costs suffered by others, but notice that the cost suffered by one person is only a minor part of the total
cost, and the greater the number of attendees at the meetings, the greater the cost
The committee problem is similar to the problem of pollution considered at
several points in this book because the meeting organizer may determine whether to call a
meeting based on some rough comparison between the costs he or she incurs (but not all committee members incur) and the benefits he or she receives However, since the
organizer does not incur all of the costs, the meeting is called when there may be few
benefits However, others, following the same logic, also call meetings, the net effect of
which is that there can be too many meetings with many of them lasting longer than their
economics (the costs and benefits) justify
Trang 7Also, at the meetings, every person there may want the meeting to be short and
productive, with every comment well thought out and to the point (just as every polluter
may want a pond with no detectable waste in it) However, once in the meeting, each
committee member can also think like the polluter, “If I make my comment, the meeting
will not be extended for long And the cost to me of my comments is surely lower than
the benefits to everyone else hearing my golden words Besides, if I don’t talk, then
someone else will The meeting will be no shorter if I hold back.” If everyone thinks
that way, then the meeting can easily be consumed with frivolous comments (or
“comment pollution”), and meeting length can seem interminable or, more accurately,
far too long (given the total costs and benefits to everyone for the issues considered and
the comments made)
This does not mean that all meetings are completely worthless Meetings do
accomplish something of value (or else, we should think, no meetings would ever be
called) The problem is that there is an incentive for people, when considering only the
costs and benefits of their own situations (their willingness to shirk their duty to restrain
themselves and to engage in opportunism), to diminish the meetings’ net value by making
a “good thing” go on for too long
What’s “too long”? It is when the additional value of a comment made on an
additional issue resulting in an additional minute spent in the meeting is less than the cost
to all involved “Too long” means that everyone there would pay all others to keep their
mouths shut if they could somehow organize themselves to do just that
Notice that the problem of overly long meetings will likely increase with the
number of people in the meeting This is because the cost an individual incurs when
making a comment, which is what the individual can be expected to focus on, stays more
or less constant, regardless of how many people join the meeting However, the total cost
to the group the “social cost” escalates as more members join the meeting There are simply more people to throw more “waste” into the meeting, with a greater likelihood of
the meeting being overly long and boring and even unproductive, given that many
people may decide to tune out
As the number of committee members escalates, each member can reason that the decisiveness of his or her votes and comments in affecting committee decisions can
diminish As a consequence, each can conclude that there is less reason to prepare for the meetings, which can mean that comments made may be less well grounded in facts and
less well thought out Each person in a very large meeting may think, “Well, heck, my
voice and vote will not affect the outcome of the meeting, so why should I prepare?”
We would be the first to admit that our arguments press the limits of economic
reasoning in that we have implicitly assumed that many people in meetings are never
considerate of others, and never try to assess the costs of the meetings they call or the
comments they make in terms of their impact on others We recognize that people, at
times and to a degree, consider the feelings and costs that they may impose on others
We talk in terms of the logic of the extreme individualist because some people, in and out
of business and in and out of meetings, no doubt will think that way They simply don’t
consider the costs to others
Trang 8However, we also lay out the logic of people consumed by their own private
interests because it reveals a force that will be at play even on people who are considerate
of others That force can grow as the committee size grows, neutralizing, at some point,
their best intentions and leading to some of the perverse consequences developed from
highly strident thinking Again, we suggest that managers must consider how people will
behave in the extreme, not because that is the way everyone behaves all the time in every situation, but because self-serving actions are the type of behavior many human beings
exhibit and from which managers must protect themselves through appropriate
organizational structures and policies
More directly to the point, we suggest managers consider our way of thinking
because it leads to suggestions for improving the performance of all meetings and
committees:
• First, managers ought to find ways of making sure that people who call meetings consider the cost of all involved We cannot make concrete suggestions, because that requires knowledge of the details of particular work environments What we
do know is that potential committee members have an interest in managers who
are tough on the issue of meetings, who are willing to call people to task for
unproductive and overly long meetings Someone, in other words, needs to take charge
• Second, managers should appoint tough people as chairpersons These are people who should be willing to cut others off when it is clear they are unprepared and
are just sounding off Managers should recognize that while individuals might
prefer meetings in which they can say what they please for as long as they want at the same time everyone else is constrained, the group can still have an interest in
tight controls on every member People are willing to give up some of their own
freedom to sound off if everyone else will, too
• Third, managers should be careful about organizing “large” meetings The
productivity of meetings tends to go down as the group size goes up As a general
rule, “small” groups should be organized when action is required “Large” groups should be assembled for the purpose of reaction to proposals that have been
devised by much smaller groups If a large committee has been formed and little progress has been made, then the committee should be broken down into smaller working groups, with each subcommittee given a specific assignment that can be presented to the larger committee for final action
• Fourth, on the other hand, if managers want to give people some sense of
participation in the decision-making process without enabling them to actually do anything, then they should make the meetings as large as possible The
participants can be expected to talk without any decisive end, leaving the person who organized the meeting with the authority to take action when something
needs to be done
We suspect that business people are more constrained in meetings than faculty
members are by a six-letter word: Profit The goals of a university education are far less
Trang 9clear, far more elusive and imprecise, because they cannot be relegated to a single
bottom-line figure (a fact that, because it works to their advantage, is nurtured by
professors) Universities are organized to produce “educated people,” which covers a
multitude of virtues and sins This means that the performance of people on committees
is hard to assess, and many meetings get bogged down in wrestling with the reasons for
the meetings in the first place, with competing factions seeking to elevate their own
personal goals above the goals for the committee, if not the university Business people
can, with greater ease, ask a very forceful question that tends to focus the committee
process, “What does this (or that) action do for the bottom line?”
In addition, university budgets are typically determined by far-removed state
legislatures Unproductive meetings can easily go undetected within the university
bureaucracies, and less by legislators who have little incentive to monitor what the
universities do at the committee level The future welfare of people in the
decision-making process is unaffected, one way or the other, by what does or does not go on in
any particular meeting There are simply no close-at-hand residual claimants
Granted, taxpayers can be thought of as residual claimants, given that efficiency
improvement in state university committee processes can translate into lower taxes, but
each taxpayer has precious little incentive to monitor universities The monitoring costs
can easily exceed the benefits that the individual taxpayer can realize from his or her
monitoring, and the probability that the monitoring will have an impact on university
efficiency is very close to zero As we have explained before, taxpayers are all too often the proverbial “free riders” when it comes to monitoring what governments generally do And when most taxpayers attempt to free ride, they end up getting taken for a ride
In many regards, faculty members who believe expelling hot air is a virtue can
thank their lucky stars for rationally ignorant taxpayers People in business must worry
that wasteful meetings will affect their jobs and livelihoods If firms hold too many
meetings, and the bottom line is materially affected, some wise investors will do what
cannot be done with universities; the investors will buy the company, eliminate the
unproductive meetings, increase the bottom line, and sell the reinvigorated company at a
price higher than the purchase price to someone who, because of the price paid, will have
an incentive to control meetings
* * * * *
Managers often spend much of their waking hours trying to figure out how they
can make more money by selling more of their product The lesson to remember is that
they can also make money by adjusting their internal structures to account for the impact
of numbers on incentives In short, more than what is produced counts to a firm
Relatively small teams have become increasingly important to business for a number of
reasons, but the most important reason is that small teams are a means by which the
actions of individual members become meaningful and more easily monitored by others Teams are a means of discouraging free riding and encouraging everyone to contribute to the value of the whole Teams are self-enforcing units Business people would be well
advised to apply the principles of teams to the organization of committees
Trang 10Concluding Comments
Economists recognize that such considerations as the “importance of the cause” can
significantly affect the willingness of the group members to cohere and pursue the
common interest of the membership However, we have concentrated on “large” and
“small” groups to demonstrate that, given other factors, an increase in group size beyond some point can have an adverse effect on the motivation which group members have to
pursue their common interest There is, furthermore, substantial evidence to support this basic conclusion Several studies have revealed that as far as being able to take action,
smaller groups, generally with less than seven or eight members, are more efficient than
larger ones.60 Studies also show that as group size within industry increases, job
satisfaction tends to decrease and absentee rates, turnover rates, and the incidence of
labor disputes tend to increase.61
As Mancur Olson points out, even students of history have noticed a difference in the ability of large and small groups to cohere and survive Olson provides us with this
quote from a book by George Homans:
At the level of the small group, at the level, that is, of a social unit (no
matter by what name we call it) each of whose members can have some
first-hand knowledge of each of the others, human society, for many
millennia longer than written history, has been able to cohere they
have tended to produce a surplus of the goods that make organization
successful
ancient Egypt and Mesopotamia were civilizations So were
classical India and China; so was Greco-Roman civilization, and so is our
own Eastern civilization that few out of medieval Christendom
the appalling fact is that, after flourishing for a span of time, every
civilization but one has collapsed formal organizations that
articulate the whole have fallen to pieces much of the technology
has even been forgotten for lack of the large scale cooperation that could
put it in effect the civilization has slowly sunk to a Dark Age, a
situation, much like the one from which it started on its upward path, in
which the mutual hostility of small groups is the condition of internal
cohesion of each one Society can fall thus far, but apparently no
farther One can read the dismal story eloquently told, in the
historians of civilization from Spengler to Toynbee The one civilization
that has not entirely gone to pieces is our Western Civilization, and we are
desperately anxious about it
60
See, for example, A Paul Hare, “A Study of Interaction and Consensus in Different-Sized Groups,” American Sociological Review, vol 17, pp 261-268, June 1952; and John James, “A Preliminary Study
of the Size Determinants in Small-Group Interaction,” American Sociological Review, vol 16, pp
444-474, August 1951
61
L.W Porter and EE Lawyer, “Properties of Organization Structure in Relation to Job Attitudes and Job
Behavior,” Psychological Bulletin, 1965, pp 23-51