What potty training reveals about excessive executive salaries.

The economic mysteries of daily life.
Jan. 13 2007 6:52 AM

Urinalysis

What potty training reveals about excessive executive salaries.

This column deals graphically with two distasteful subjects: excessive executive pay, and poop. You have been warned.

Let me start with poop. The elder Miss Harford demonstrated yesterday that she is very capable of controlling her bodily functions. She peed on the floor five times in quick succession in an attempt to divert her mother from feeding the younger Miss Harford.

Advertisement

Fine. She has the capacity to use the potty, so all that is now required is the right incentive. Chocolate coins turn out to be the sort of currency a 2-year-old understands. Successful use of the potty earns a chocolate coin. It works, and is money well spent.

Yet two days into the contract, problems are emerging. What is "successful use of the potty"? This morning, my nose alerted me to a borderline case: an enormous turd on the sitting room floor, and a tiny rabbit-dropping in the potty. At this early stage, we chose to accentuate (and reward) the positive. In a month's time, I will be less impressed, but can we really move the goal posts then?

Even straightforward incentives can be manipulated. The great pole-vaulter Sergei Bubka repeatedly broke the world record by a centimeter and earned a cash bonus every time. I have visions of a near future in which Miss Harford empties her bladder one drop at a time in order to scoop bagfuls of chocolate coins.

As we are discovering, apparently black-and-white matters of performance can quickly become shades of gray. It is much more tempting to resort to discretion: If we're happy with Miss Harford's potty performance, chocolate coins will be forthcoming.

This sounds a bit like your boss's vague promise of a salary review sometime the year after next. Employees know that bosses are lying weasels and wisely ignore such empty gestures. Daughters know that parents are lying weasels too, and that is why we must keep our incentive payments as unambiguous as possible.

Employers want to offer incentives for good behavior, just as parents do. But how to combine the oh-so-important discretion with the credibility needed to make the promises persuasive?

One possibility is to rely on relative performance. The boss can announce that the best three performers in the office will receive a $1,000 bonus at the end of the year. There is no weaseling out of such a promise, and there is no incentive to give the bonus to bad workers instead of good ones, but the boss retains the flexibility to decide what a good performance actually means.

This sort of payment structure is called a "tournament," and it was described by the economists Sherwin Rosen and Ed Lazear (now chairman of the president's Council of Economic Advisers) in a famous article. Tournaments not only combine credibility with flexibility, they also protect workers from risks outside their control: In a down year, everyone might do poorly, but the people who did least poorly will still be rewarded.

TODAY IN SLATE

Politics

Blacks Don’t Have a Corporal Punishment Problem

Americans do. But when blacks exhibit the same behaviors as others, it becomes part of a greater black pathology. 

I Bought the Huge iPhone. I’m Already Thinking of Returning It.

Scotland Is Just the Beginning. Expect More Political Earthquakes in Europe.

Lifetime Didn’t Think the Steubenville Rape Case Was Dramatic Enough

So they added a little self-immolation.

Two Damn Good, Very Different Movies About Soldiers Returning From War

Medical Examiner

The Most Terrifying Thing About Ebola 

The disease threatens humanity by preying on humanity.

Students Aren’t Going to College Football Games as Much Anymore, and Schools Are Getting Worried

The Good Wife Is Cynical, Thrilling, and Grown-Up. It’s Also TV’s Best Drama.

  News & Politics
Weigel
Sept. 20 2014 11:13 AM -30-
  Business
Business Insider
Sept. 20 2014 6:30 AM The Man Making Bill Gates Richer
  Life
Quora
Sept. 20 2014 7:27 AM How Do Plants Grow Aboard the International Space Station?
  Double X
The XX Factor
Sept. 19 2014 4:58 PM Steubenville Gets the Lifetime Treatment (And a Cheerleader Erupts Into Flames)
  Slate Plus
Slate Picks
Sept. 19 2014 12:00 PM What Happened at Slate This Week? The Slatest editor tells us to read well-informed skepticism, media criticism, and more.
  Arts
Brow Beat
Sept. 20 2014 3:21 PM “The More You Know (About Black People)” Uses Very Funny PSAs to Condemn Black Stereotypes
  Technology
Future Tense
Sept. 19 2014 6:31 PM The One Big Problem With the Enormous New iPhone
  Health & Science
Bad Astronomy
Sept. 20 2014 7:00 AM The Shaggy Sun
  Sports
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.