To improve performance of employees, incentives must be restructured

To some extent man is selfish by nature. In most cases we tend to think in terms of gain and loss. Where gain is guaranteed, like wealth inherited from parents, it is taken for granted and the base over which we think of adding further gains. There is generally no need to work hard for something which is going to come us without any toil. Only when gains are tied to efforts, energy follows. More than expecting otherwise, it is reasonable and more importantly pragmatic, particularly in the domain of policy formulation, to accept truth than to deny it. After all policy is made on what works, rather than what should work.

Adam Smith’s ‘invisible hand’ that he thought was best to be kept free so as to achieve economic efficiency was nothing but this individual self interest that had the potential to cumulatively gear the economic system up to optimum efficiency. Accordingly, it would be stagnating to hold this ‘invisible hand’ through different forms of government interventions. Laissez faire was good just because it allowed self-interest to work as it wanted, thereby increasing productivity and output. Each one would get and have claim only upon what he contributed. Free market economists called this theory of marginal revenue productivity which also determined the distribution of income.

On the flip side, economists like Joseph Stieglitz warn of dangers of leaving it too free because self interest would coax more influential actors in a community to exert individually, or collude with each other, to snatch larger portions of the national pie without actually contributing that much. In his classic work on the subject, The Price of Inequality, Stieglitz argues that self interest narrowly defined (which ends up in rent seeking behaviour) of influential business class in conjunction with political apparatuses not only tend to move income up from the poor to rich, instead of supposed trickling down to the poor through free market forces, but in the process even result in net loss to society. To prevent these unhealthy outcomes, there was an urgent need to regulate self-interest, for instance to prevent increase in inequality in which rent seeking plays a dominant role.

Either way, individual self-interest is central in making or marring developmental aspirations of a society. Accordingly, its taming is one of the most important challenges in policy formulation. Self-interest can work to incentivise economy either to perform or to stagnate. And it is here where the role of appropriateness of structure of incentives come, which plays a dominant causative role in shaping performance of an economy. Most economies that perform better have essentially been able to put up an efficient incentive structure, concomitantly investing in public utilities like infrastructure to ensure enabling environment for exploitation of human potential. This is one of the basic lessons from development experience.

Earlier, the income incurred by leased land was called rent. Those who earned it did not contribute to creation of wealth. Mere possession of the resource entitled them to a fixed income. The production, in principle, was not dependent on rent and could occur even in its absence. The principle applies even to the wealth gained by a mere possession of or access to resources, for example monopoly power, and the practice is called rent seeking. It’s implication is that people prefer to work in the public sector because it leads to definite income usually unconnected, or loosely connected to outcome. Thus, motivation for employment in the public sector is partly accounted for by rent seeking. It is like possession of resource which earns rent without actually contributing to creation of wealth. When salaries are completely unconnected to outcome, there is no doubt that it is an invitation to rent seeking. To expect otherwise, particularly by policy apparatus, is to think against the tide they themselves set in motion. The remedy lies in rectification of incentives that motivates a particular behaviour at workplace.

Many times we look at technical and natural outcomes from moral perspectives when they are least relevant to them. For example, if children are put in examination circumstances where copying is accessible, they will indulge in it. Instead of mourning moral depravity of the students it is the responsibility of examiners to ensure least possibility of copying, which again is a technical matter. If examiners fail to check it they are more responsible for copying than students whom they put in such circumstances. To look to this from a moral prism may seem ordinarily right but is technically wrong.

Further, honesty is not merely a moral issue. It is simultaneously a social and economic phenomenon. Many times we abstain from corruption not because of conscience but out of consciousness of the associated potential costs, like social backlash. Countries with higher level of integrity tend to have high social costs of dishonesty and vice versa. Corruption may even be technically possible, but social consequences maybe severely inhibiting. In others one can go without being zeroed in by society. As more people fall into disgrace, disgrace seems not a serious social dent. It may still be easy to find friends, work comfortably in an office, not come too much under media scanner, marry in respectable families, as well as enjoy other social spaces and even join political fora. No wonder in many countries a representative profile of a politician is studded with dots of criminality to the extent that criminality becomes partial eligibility for entry into politics.

In law and books, dishonesty will be reprehensible, but given its shallow social and political costs, to most people it will be bearable. In such circumstances, on the contrary, integrity instead of dishonesty, may be uncommon, not because it is unworthy of being adopted, but due to heavy social and economic costs. An honest official may become unacceptable and thus shuttled between locations and departments or posted in cold storage with inconsequential assignments. Majority, as such, will have to learn to be otherwise. Integrity or lack of it is, thus, deeply influenced by incentives at work in an economy.

Incentives or lack of these, play a dominant role in our behaviour at workplace. In same sector, with same physical and financial capital, even work rules and time, number of employees, targets of production, and sources of raw materials, two firms may produce severely divergent outcomes. This has been patently recognised in most countries where private and public sectors operate simultaneously. While as firms operating in private sector flourish, those in the public sector languish. And most of the times, taxes collected from the private sector are employed to overcome deficits of the public sector.

As people employed in government owned enterprises realise that their salaries will not be affected despite lackadaisical and nonchalant behaviour, they lose the incentive to work diligently. Most PSUs come under debt and incur heavy losses even today is well known. It is widely acknowledged that performance in government sector despite larger investment is found wanting. The case of these non-performing public sector undertakings is classical of the need of proper incentives.

Therefore, government’s pay policy can work either to create efficiency or inefficiency. Mere salary is not important, but the way it is structured and related with outcome significantly determines efficiency or lack of it. The public sector employees are not less learned, less trained or less experienced. On the contrary they are generally better equipped in terms of these parameters. However, the differential feature emerges from the structuring of emoluments and profits in private sector.

This is not to say that everything within the private sector is well in order and beneficial for entire society. Apart from many serious issues, many sectors are seriously exploitative either to labour force or consumers. For example in salary and other benefits of teachers, its practice is exploitative. Employees suffer from underpayment, economic insecurity, and at times even humiliation.

While those at the top, particularly the owners, take a disproportionately larger share, those whose efforts produce this wealth get a minimum possible. This needs good laws that ensure dignified and gainful participation of labour force, particularly the educated youth. Discounting the exploitation and some other core issues, however, private sector performance has usually been better than that of the public sector.

For instance, performance of the public schools in many cases pales in contrast to that of the private sector. It is not, and should not be purely seen as a moral issue. It is more a matter of working of incentives, economic and otherwise. In the private sector, the school management having economic incentives in their school’s performance take necessary steps to ensure it. On the contrary there is no tying up of pay to performance in the public school system. There are some, but they are ineffective and avoidable. For example, at the secondary level, most schools subvert the prospective negative implications of the shortfall in results by conducting detention test, thus effectively avoiding incentive barrier.

But there are good examples of incentives at work in the public school system as well that instructively make a case of their importance. In the school department many talented teachers switch over to clerical functions because of many benefits. Before the department checked entries into service books of the leave salary thus earned in winter, this was one of the main benefits. In comparison to peers they had an obvious benefit that prepared them for the role; leave salary. Similarly, proximity to school authorities warrant many other benefits like leaving schools without leave, avoidance of attending classes and even pecuniary spill overs. More than highlighting problems within the department, this shows the incentives matter a lot. Those who blame low performance of the school system and project issues from a moral perspective need to look into it from a technical perspective. It must be seen as a policy failure rather than a moral one. It is not a merely an issue of integrity or lack of it in the system, it is an issue of appropriateness of incentives. The inefficiency of the department results from inappropriateness of schemata that the employers are subjected to. If that schemata improves, so will the performance of the system.

Currently it is almost impossible that mere performance gauged from different parameters can give an edge to employees, for example in school department. If some of them work hard, conduct research, present papers, write books, etc., are they anyway going to be benefited. Though these things are seriously fundamental to keep an academician in touch with a fast changing academic world, they are not on the menu of rewarding activities and cannot provide a bonus for example at promotion. And if not, there is no reward for efficiency. As a result it is our policy represented by the incentive structure that is responsible for breeding inefficiency. Rather, from a self-interest perspective defined narrowly, better not to do any of these, because these activities are toiling and in many cases expensive. Most employees end up with this unfortunate realisation.

There is an urgent need in economies like ours to link pay with performance in different ways possible. Due to corruption embedded at all the levels of government engagement, the salary that employees get, apart from few honest and sensible ones, instead of giving necessary economic security to perform freely does exactly opposite of what it is meant for. This rent seeking has been found prevalent in government departments across developing countries, notably so in South Asia. However, even in case of the private sector, like the financial sector in the US, where incentives for foul play exist, the results won’t be different. Whether one is in the public or the private sector, it is the structure of incentives that one is subjected to that determines behaviour at work.

The seventh pay commission recommendations are in the process of implementation and the state will inevitably fall in line. The added money apart from that already paid will not come from heaven. Taxpayers will bear an added direct burden or indirect one in the form of diversion of overall shares allocated to different public amenities. With added resources devoted to employees, there is need to look into performance of the entire gamut of public serves. And at the core of this rethinking and redesigning, emoluments need to be structured in such a way that will incentivise productivity and disincentivise rent at all levels.

—The author is a lecturer in the directorate of school education. Feedback: jazrather@gmail.com