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The facts about incentive pay

In the following essay, I am going to analyze incentives for workers to perform tasks, and thus come up with a conclusion as to what makes the most sense for employers to incentivize their employees with. I will back up my analysis with the mention of two research papers.

The exchange of money for the completion of tasks, the labour market, is arguably one of the most important transactions for the ongoing of our economy. If it did not exist, we would not be able to progress further into developing our world into a better home for the generations to come. And with this importance, comes a concept just as important, keeping employees just as motivated to continue working.

Human nature is such that motivation within us does not last forever, and thus refilling ourselves on a constant dose of motivational fuel is pivotal in the success of our tasks.

There are in general, two types of incentive pay, which are merit pay and bonus pay. Merit pay can be defined as the permanent increase related to performance against a standard that reflection evidence of permanently increased productivity. The term bonus can also be defined similarly as a single period additional pay related to performance that may not be reproducible in the next period without sufficient additional effort. We will examine the advantages and disadvantages of both these pay structures.

Under the umbrella of merit pay is the piece rate, where workers are paid on the basis of the output they produce. Piece rates hold the benefits of workers are motivated to produce more output because of the fact that their wages are directly proportional to their pay, it is a system that attracts good workers due to the fact that more skilled labour will want to join the company because of such a pay structure, and there exist savings of monitoring workers and keeping track of their productivity.

Seeing how effective such a piece rate method of payment is, I am going to support my argument with supporting research. Edward Lazear wrote a paper titled “Performance Pay and Productivity” where he examined how effective the incentive pay of piece rate was in inducing workers to produce more output. His examination of personnel economics uses data from a company called Safelite Glass Corporation, which is an auto glass company. His use of this data derives from the fact that in 1994 and 1995, management in the company changed the compensation from hourly wages to piece rates. This provided the necessary data to analyze how effective the new piece rate was in inducing more output.

His findings can be summarized into the following points:

1. A switch to piece-rate pay has a significant effect on average levels of output per worker. This is in the range of a 44-percent gain.

2. The gain can be attributed to two components. Approximately half of the gain in productivity resulted from the ability of the company to hire a more able workforce.

3. The change to piece rate resulted in both gains in productivity for the firm and benefits for the employees. Employees on average earned 10% higher due to the change.

4. Switching to a piece rate increases the variance in output. More ambitious workers have less incentive to differentiate themselves when hourly wages are paid than when piece-rate pay is used.

Even though these findings are specific to one firm, they provide useful insights into how piece rates can affect employees and firms.

In a different research paper titled “Pay Enough or Don’t Pay At All” by Gneezy and Rustichini, the researchers find that some employees react negatively to the piece rate offered if the wages are not substantial enough.

The researchers set out to figure out whether the default economic theory that incentives should induce performance is realistic in the complex world we live in. The researchers conducted an experiment in a lab where students were asked to answer a few IQ test questions and were told that they would be paid a piece rate related to the number of answers they got correct. They got a base pay for showing up for the test and then the subjects were divided into three groups that were randomly assigned a piece rate.

What the researchers found is that the test subjects perceived the piece rate as follows. The test subjects just offered the base pay and nothing more did the job more effectively than subjects that were offered a small piece rate plus base pay. This is because offering a small piece rate changes the perception of the contract as explained below.

If a zero piece rate is offered, subjects tend to perceive the ‘contract’ as follows: “The experimenter has offered me 60 cents to do a job. Now I know what that job is –answering questions—and it is my job to do it satisfactorily.” Putting this in a different way—subjects interpret this as a gift exchange contract.

If a positive piece rate is offered, subjects tend to perceive the contract more as follows: “The experimenter has offered me 60 cents to show up. I’ve done that. Now he is offering me 10 cents per question to answer questions.

The question of incentive pay is an important question labour economists have been trying to answer for years and we need to strive as a society in figuring out what the most effective way of motivating our employees is. In the above analysis, I briefly touched upon piece rate with some evidence from research, but there are a variety of incentive pay schemes the labour market can take advantage of.

Piece rates can be effectively put to use to induce productivity if used correctly. In the case of the first research paper, the nature of the work determined the success of the piece rate. In the second research case, a high piece rate was effective in inducing higher productivity. The piece rate, if implemented wisely, can be a very important determinant in a company’s labour output.

References
1. Gneezy, Uri, and Aldo Rustichini. “Pay Enough or Don’t Pay at All*.” Quarterly Journal of Economics, vol. 115, no. 3, 2000, pp. 791–810., doi:10.1162/003355300554917.
2. Lazear, Edward. “Performance Pay and Productivity.” 1996, doi:10.3386/w5672.

Are the costs of University worth it?

In this essay, I will present data from a research that Douglas. A. Webber finds to analyze whether college costs are worth the financial costs they implicate on the individual. In today’s competitive labour market, it is pivotal to know whether college costs are worth the effort. There are varying forms of education, and some occupations are better learned from on-the-job training.

Douglas A. Webber, in his paper, addresses through in an analytical approach whether it is a sound financial investment to go to college after high school. His approach takes the form of comparing the monetary costs associated with the 4 years of attending college with the monetary wage benefits that people who have attended college enjoy. He controls for settings such as major, student loan debt and ability in his analysis.

Motivation:

“The most recent graduating college cohort is burdened by an average of roughly $30,000 in student loan debt, while the national total has surpassed $1.2 trillion, a figure that some claim represents an economic bubble which could have substantial negative effects for future generations.”

Weber conducts this research due to the fact that college debt and people graduating college has been on the increase for a while now, with a number of students reporting a sense of non-fulfillment from their educations. This paper discards the opinions and conducts a quantitative analysis.

Data:

Weber makes use of 6 data sets in his analysis: NLSY79, NLSY97, 2014 ACS, CPS, 1993 NSCG and 2003 NSCG. He makes use of such varying data sets to control for different characteristics such as cognitive ability and age. This is important to make sure the analysis is done in a fair and accurate manner.

Methodology:

Weber formulates a methodology that aims to calculate the age at which the costs of a college education are surpassed by the benefits attained from attending college. The costs of a college degree include both implicit and explicit costs, implicit costs related to the forgone earnings from the time taken up when attending college. The model created caters for selection into college and specific majors based on cognitive and non-cognitive factors.
Weber uses regression models to calculate the age at which an individual would find a college education worthwhile.

Results:

Weber presents 6 tables in his results section, including summary statistics, simulated expected lifetime earnings, break even ages, and the discounted value of degrees. He presents a variation of some data at the 25th percentile of ability and for the discounted value of a degree, he presents a version that allows for major switching.

The most important of the tables that lead to the main conclusion is shown here.

The expected earnings include the possibility supported by statistics that college graduates are likely to not graduate in 6 years’ time. The college costs included in the analysis are $30,000 of debt at graduation at a 4.3% interest rate and $7000 per year not financed by debt.
Weber then discusses the time it takes for the expected value of a college degree to exceed that of a high school diploma. Results presented in the table below.

The notable results from the above table are that there is only one case where the expected value of a college degree will not surpass just a high school education when college expenses are high and the individual majors in Arts/Humanities. Most majors for different variations exceed their costs at some point during an individual’s life.

Conclusion and remarks:

Weber finds that attending college is a sound financial decision for most people and supports this claim by analyzing and controlling for rate of dropout, an ability of individuals, majors etc.

Weber admits that there needs to be added transparency to high school graduates about what exactly they are getting themselves into. High school graduates are at a young age when making the decision to go to college and finance this experience with debt; a lot of students might not fully understand the nature and payoffs of their decisions. Society plays a role in this too, in the way that society has created the notion that the best step forward after high school is college.

Another point to discuss for the Weber analysis is the lack of attention towards other implicit costs of college such as stress and mental health. Full credit is given to Weber for his thorough analysis and control of ability, and I assume the reason he did not include other implicit costs was the subjectivity of assigning a monetary value to a concept like stress, but I do believe it could have been incorporated somewhere into his model. An effort to estimate average yearly spending towards counseling by universities and distributing this to each individual is an example of a method that may have been used.

To wrap up, Weber takes the question of “Are college costs worth it?” and gives a thorough analysis in answering the question for the purposes of making it easier for high school students easier to choose or avoid college. My personal thoughts on reading the paper were quite ‘bittersweet’. It was insightful to see why most people choose to go to college, but there is a feeling of unease that I am reading this just as I am about to graduate college.

REFRENCES

Webber, D. A. (2016). Are college costs worth it? How ability, major, and debt affect the returns to schooling. Economics of Education Review, 53, 296-310. doi:10.1016/j.econedurev.2016.04.007

This article was written by volunteer & co-op student Mohammadali Saleh.

Whitewashing Hollywood

We all watch them, use them as forms of entertainment, and follow the news leading up and after them. But did you know that there is an entire strategy behind how movies and Hollywood pick their actors and actresses to skew the racial distribution?

The term used to best describe this practice is “white washing” and can be defined as the entertainment industry’s attempt at making ethnic characters more appealing to the white, money-spending masses by making exotic characters less ethnic and more “white.” An example of a whitewash would be an Asian movie cast with half Asian actors and actresses instead of ethnically Chinese actors, even if the roles required the actors to be full Asian.

Such whitewashing not only plays a role in direct consequences for the viewers of the film, it also plays an important role in propagating its effects into society’s realms. Numerous times, Middle Eastern, or people of colour, have been asked to play roles as criminals or terrorists in films. Statistically, the majority of terrorists around the world are not Middle Eastern and criminals are not always people of colour.

In an article recollecting 7 Middle Eastern actors and their experiences with such discrimination, one actor says “…I had an epiphany. I called my agent: ‘Hey! Don’t send me out on these terrorist parts anymore. I’ll be open for anything else, but not the terrorist stuff.’ “After that, she never called. [She used to call] three or four times a week.” (GQ online magazine).

The statistical evidence by the FBI is that 94% of terrorist attacks in the USA from 1985 to 2005 have been by non-Muslims. Putting that into perspective, an American terrorist suspect is over nine times likely to be not Middle Eastern than Middle Eastern. According to the same report, there have been more Jewish acts of terrorism than Muslim, but when was the last time you saw a Jew being cast as a terrorist in a movie versus a Muslim Middle Eastern?

A recent example of such colour whitewashing has been the casting of Scarlett Johansson, a blonde white actress in a Hollywood remake of classic Japanese anime Ghost in the Shell. The argument used by the movie producers and directors for such Asian white-washing is the argument of green colour, the amount of money the movie would gross if they would not hire a white actress.

The argument of money should not be valid anymore as the world progresses towards eradicating racism. An increasing number people are becoming accepting of people of a different colour and will definitely pay to see a movie even if the lead character is non-white. Many scholars have partially blamed the entertainment industry for the racism that exists in the world today and it only makes sense for the same industry to solve the problem.

Another common argument Hollywood uses for casting non-minorities in their movies is simply that there exists no talent in the minorities. However, this argument does not hold much water. In fact, Hollywood has recently developed a strong reputation for casting relatively modest actors and actresses in blockbuster films. One look at the Marvel Studios model shows at the time of their initial casting actors and actresses such as Robert Downey Jr., Chris Hemsworth, Chris Evans, Chris Pratt, and Scarlet Johansson were not guaranteed box office commodities. So apart from it being Marvel Studios, and most of them having the first name “Chris,” why were these actors considered safe risks while Asian actors aren’t given the same luxury? The only other variable is that they are white. Hollywood will risk box-office uncertainty on Caucasian actors, while not risking box-office uncertianty with Asian actors, but not all is lost with whitewashing. An actor, Ed Skrein, exited a movie once he figured out that the role was whitewashed. It seems like the more awareness we generate about this, the more likely the problem will go away.

This article was contributed by volunteer blogger & co-op student Mohammadali Saleh.

The Gender Wage Gap Explained

Many famous individuals have used the quote “Women earn 79 cents for every dollar a man makes”, and although this fact is statistically true, there is a lot that is unexplained in it. The above fact only compares the two median wages of men and women and does not factor into account how the wage gap plays out in individuals with different education levels, different occupations or different ages. These factors are very important to take into account if we want to ever close the gender wage gap.

To explain much of the argument on the gender wage gap, I must first state that economists have modeled wages through the Mincer Wage Equation, which can be stated as:

The equation above can be interpreted as log wages is a function of the years of schooling, plus the amount of career experience, and career experience squared, and an error term and a constant term for other unaccounted for factors. In simpler words, employers reward employees for the amount of schooling and experience they hold.

Child-bearing responsibilities

June O’Neill wrote a paper in 2003 studying the gender wage gap in the US economy by looking at two population surveys. In his conclusion, he writes, “As I have shown in this paper, the unadjusted gender gap can be explained to a large extent by nondiscriminatory factors. Those factors are unlikely to change radically in the near future unless the roles of women and men in the home become more nearly identical.”

What June O’Neill meant to convey in her conclusive remarks is that much of the gender wage gap can be attributed to the fact that females are the only sex that is biologically able to produce offspring. It is not a discriminatory attribute that women have the ability to give birth, and this ability has continuously led to the difference in the amount men and women earn.

What usually tends to happen after college graduation in today’s labour market is after holding a stable job for a few years, when women are in their mid-twenties and thirties, they usually take some time off to give birth and nurture the child after birth. In a study conducted by Bertrand, Goldin and Katz to examine the gender wage gap in MBA graduates, they state that one of the principal reasons why there exists a big gender wage gap between men and women is that in the first fifteen years post-graduation, women take on more career interruptions and work shorter weeks because of household responsibilities. The study also finds that even though some women took modest breaks from work for parental leave, the labour market penalized these breaks greatly. The discontinuity in a professional career during this age is also the prime time to build one’s career.

Such discontinuity is penalized by a lower wage, and this is quite fair because the said individual took time off during a time where they could be obtaining prime experience in their careers. June O’Neill finds that 34% of women with children under the age of six were out of the work force between the ages of 25-44 compared to only 16% of women who were out of the workforce who did not have children. Making the choice to have a child is a quite strong indication of work discontinuity which will directly lead to a loss in experience gain and a lower wage.

Career choice

The science behind the labour market is centralized around human capital theory, where employees are rewarded with wages for their ability to demonstrate their knowledge and do so efficiently.

Again, it is no secret that some careers are better paid in today’s world than others. This is a harsh reality in some underpaid occupations, but in other cases, it is quite justifiable. Rewarding an occupation like a surgeon to perform life-saving operations is very fair in my opinion.

“The expectation of withdrawals from the labour force and the need to work fewer hours during the week are likely to influence the type of occupations that women train for and ultimately pursue” – O’Neill, 2003. This statement in his paper is given by examining the career choices that women have chosen and how they came to the decisions that they did through population surveys. Women tend to lean towards occupations where there is more leniency towards career discontinuity and careers where part-time worked is more readily available. A direct example of this is the nursing versus doctor industry, where most nurses are women. Nurses hold set shifts and know exact times when they will be working and so is more favourable to a mother who has to care for a child. As an emergency doctor that can be called in at any time during the day, your shifts can vary a lot and it would make life difficult to care for a child and be on-call at a hospital.

Conclusion

Much of the gender wage gap can be explained by the two factors that are outlined above. The fact that women take breaks during their working life to nurture children and build their households, and that women choose careers that are more flexible in the hours that employees are required to work, which is a result of the time off women need to take to have children.

Although this explains a lot of the gender wage gap, there is evidence to support that some of the wage gap is purely discriminatory. But there is some good news to accompany this, Pew Research Centre conducted a study that found that “The gender gap in pay has narrowed since 1980, particularly among younger workers…” and so there is some hope that someday we will be able to eliminate the gender wage gap completely.

References

Brown, A., & Patten, E. (2017, April 03). The narrowing, but persistent, gender gap in pay. Retrieved August 11, 2017, from http://www.pewresearch.org/fact-tank/2017/04/03/gender-pay-gap-facts/

O’Neill, J. (2003). The Gender Gap in Wages. The American Economic Review, 93(2), 309-314. Retrieved August 7, 2017, from http://www.jstor.org/stable/3132245

Bertand, M., Goldin, C., & Katz, L. F. (2010). Dynamics of the Gender Gap for Young Professionals in the Financial and Corporate Sectors. American Economic Journal: Applied Economics, 2, 228-255. Retrieved August 04, 2017, from http://www.aeaweb.org/articles.php?doi=10.1257/app.2.3.228

This article was written by volunteer Mohammadali Saleh.

Opinions expressed are not necessarily those of Journey to Diversity Workplaces.

J2DW is crowdfunding!

Hello everyone,

We are excited to announce that we have taken the initiative to set up a crowdfunding campaign to make it easier for you to contribute to our causes.

Our team sat down a few months ago and came up with a number of goals we would like to achieve over the next few months, but we hit a dead-end in trying to achieve these goals because of a limitation of our financial resources. So that is why we set this campaign up, and we are absolutely confident that you will help us raise these funds.

To give you a better overview of the plans we have for the use of these funds, we have summed up three of our main priorities to achieve once we have the funds:

  • Acquire a service business and restructure it so as to serve as role model business for the message of diversity and good employee management. This business will be profit generating so as to contribute funds to other sectors of J2DW.
  • Campaign and raise awareness of the problem of diversity in the workplace. Too many people are still very ignorant about the issues that exist, and this is in our opinion, unacceptable.
  • Dive deeper into the research of the roots of the problem. Why is diversity still a problem in the workplace? We want to figure out the answer to this daunting question once and for all.

    • In addition, funds will also be set aside to fund a new scholarship that was recently created by the Board.

    The Doris Tretter memorial scholarship for diversity in the fine arts will help youth in our communities be able to access fine arts education at the post-secondary level.

    In addition to or instead of a financial contribution, you can:

    1. Post to Facebook and social media – The more people who hear about us, the more likely we are to meet our target. 

    2. Share with your community – Call your friends, tell your co-workers, make an announcement at your organization’s event to spread the word. 

    Generosity (the platform we’re using, run by Indiegogo) has zero platform fees, so your donation goes farther to help us reach our goal. 

    So please help us by contributing to the crowdfunding campaign. Any donations will be greatly appreciated!

    Join our crowdfunding effort today!