The Tragedy of the Commons and Merit Pay

The topic of pay-for-performance came up in a recent meeting, and someone drew a comparison between the challenge of making merit pay work and the classic dilemma The Tragedy of the Commons.  It was a beautiful point and I'm not sure I can do it justice here, but I am going to give it a shot.

A little background.  The theory underlying the Tragedy of the Commons dates back as far as Aristotle, but it was popularized in modern times by the essay of the same name written by Garrett Hardin for Science.  Essentially, it describes the dilemma that occurs when the short-term interests of individuals are at odds with the long-term interests of the group. 

I like Wikipedia's summary of Hardin's article:

This story describes a group of herders having open access to a common parcel of land on which they could let their cows graze. It is in each herder’s interest to put as many cows as possible onto the land, even if the commons is damaged as a result. The herder receives all the benefits from the additional cows but the damage to the commons is shared by the entire group. Yet if all herders make this individually rational decision, the commons is destroyed and all will suffer.

As Hardin and others point out, the "tragedy" plays itself out in a wide range of modern day "commons" - beginning (but not ending) with our use of resources such as water, parks and wetlands, fish stocks and oil.  I believe we often see a similar dynamic at work among managers when it comes time to assess their subordinates' performance and hand out merit increases.

The actions of many managers would suggest to me that they see their role and their primary objective in the merit pay process to be getting the highest possible increases for each of their reports, however that might be accomplished.  If gaming the pay system is the most expedient way to get there, then so be it. 

The outcome of this behavior is that the ability of the group (the organization) to pay for performance, to differentiate and reward the employees who truly go above and beyond in their roles, is compromised in favor of the individual manager trying to maximize the pay levels of his/per particular group of employees.  Peformance-based pay ultimately fails.

Addressing this "tragedy" requires more than simply training managers in the nuts and bolts of how the performance management and pay systems work.  It requires directly dealing with the definition of what it means to be in a management role.  And I would submit that the role of a manager is one of stewardship; of being good stewards of the organization's resources - both human and economic.  Stewardship involves actively balancing the needs of both employees and the organization.  What it isn't is putting the short-term interests of their reporting employees above the longer-term interests of the larger group.

Until we hold managers accountable for their roles as stewards, we will be unable to conquer this particular Tragedy of the Commons and our pay-for-performance efforts will never really leave the starting gate.

   

Comments

[Wally Bock]

Congratulations! This post was selected as one of the five best business blog posts of the week in my Three Star Leadership Midweek Review of the Business Blogs.

http://blog.threestarleadership.com/2008/05/21/52108-a-midweek-look-at-the-business-blogs.aspx

Wally Bock

[Andres V Acosta, SPHR]

Interesting analogy, you definately did it justice!

To bring the idea full circle ... how do you reccomend shifting the managers focus from short-term (raising teams wages), to long-term company success?

Holding "managers accountable for their roles as stewards" has a nice theoretical ring to it, but if: 1) Nuts and bolts training and
2) Performance based pay systems, aren't the answers ... then what is?

What are some effectual processes, tools or practices that can motivate managers to put the company long-term success before the immediate compensation pressures of their team?

[Ann Bares]

Wally:

Thanks! Always an honor to make the Midweek Review cut!

Andres:

Great questions... hmmm, perhaps a follow-on post is in order. Back to you on that.

[Chris Young]

Ann - Beauty of a post! You really got me thinking about this issue...

As a compensation expert, do you feel that pay for performance plans can be saved by more strictly defined performance metrics and accompanying rewards? ie... Attaining a manufacturing defect rate of less than .01% earns a $1000 bonus... .001% earns a $2500 bonus etc.

I see the prevelance of the problem you described above, but I can't help but wonder if it's the concept of merit pay that is flawed or if it's the systems that organizations implement that are causing this problem.

-Chris Young

[Ann Bares]

Chris:

Thanks for the comment, and for featuring the post on your "Fab Five" this week. Readers, if you aren't already familiar with Chris' blog, Maximizing Possibility, be sure and check it out!

http://www.maximizepossibility.com/employee_retention/2008/05/our-fab-five--3.html

You ask some great questions. I do think that clear communication, up front, about what will be rewarded and how, is essential if we are looking for a reward plan to actually impact behavior and efforts. As in the example you provide. And, of course, we need to be VERY careful about what we choose to reward, ala the law of unintended consequences.

Merit pay - the attempt to reward performance by differentiating salary increase amounts - faces a myriad of challenges in today's organization, not the least of which is trying to do so with 3-4% salary increase budgets. And yet ... even in light of these difficulties, I still think there is merit in the concept of merit pay.

See more discussion in this earlier post on the "merits" of pay for performance:

http://compforce.typepad.com/compensation_force/2007/04/can_there_be_to.html

[Ilya]

Classical 'Tragedy of the Commons' may be solved by 'splitting' Common to small parts.

So, why not fix amount of money distributed by each unit manager?
When distributing fixed amount of money, unit manager would have no reason to increase average scores of his/her unit.

The amount or money for each unit (unit increasing program) may be calculate on base of:
1)'calculable outcomes' of unit work (if exists) - as Chris Young
wrote,
2)unit work evaluation from the top management,
3)common % increase for each unit total salary summ.

Is this the Solution?

[Chris Young]

Ann - Thanks for the follow up and link to your previous post.

Your posts really bring to bear the complexity and nuances of compensation plans.

Thanks for the food for thought!

[Ann Bares]

Ilya:

It is a worthwhile suggestion, and mirrors the relatively common approach of asking individual work units to adhere to a particular merit budget. While this keeps managers - in theory at least - from dipping into the collective pool of merit funds, it also relies on the assumption that performance is evenly distributed across all work units. In other words, it assumes that you won't have a group of relatively higher performers in one group and relatively lower performers in another - an assumption that gets trickier as work groups get smaller. My concern - are we setting up for some of the same issues as when we force performance distribution?

http://compforce.typepad.com/compensation_force/2008/04/forced-performa.html

[Ilya Kudryavtsev]

Ann:

I agree - the same problem of distribution would arise 'one level higher' (problem to distribute scores and money between units).
We can construct all-level hierarchical 'feudal-like' structure from top to down: manager 'one-level-up' fixes 'increase amounts' distributed by managers 'one-level-down'. But it would be too tangled (and may give way to corruption).

The other way - to diminish using of 'evaluating by managers'.
We can use 'measurable' outcomes of unit and employee work instead.
And if we need evaluation - better using 'evaluation by inner clients' (those units/persons our unit make job for).

The third way - to improve manager culture.

Unfortunately all the ways are not easy :-)

[Ann Bares]

Ilya:

Great and very thought provoking comments! And, I agree with your closing statement: If any of these were easy, I guess they would already be happening, right?

Thanks for lending your well-considered perspective to this!