Money is not the answer

Cecil Graham: What is a cynic?
Lord Darlington: A man who knows the price of everything, and the value of nothing.
Cecil Graham: And a sentimentalist, my dear Darlington, is a man who sees an absurd value in everything and doesn’t know the market price of any single thing.
Oscar Wilde, Lady Windermere’s Fan (1892)

Perhaps this blog is simply a call for more sentimentalism in our excessively cynical world, though perhaps we should aim for fair values rather than absurd ones — remembering that fair value is not always the current market market price.

Just as we trip ourselves up when we insist on trying to simplify complexity into a handful of handy financial metrics, so we make a mistake that money is the sole motivator — or even an appropriate motivator — for senior executives.

In a wonderfully blunt article a few years ago, the Harvard Business Review highlighted the fact that the work of CEOs is peculiarly ill-suited to performance-related pay. Stop paying executives for performance, the article stated, “from a review of the research on incentives and motivation, it is wholly unclear why such a large proportion of these executives’ compensation packages would need to be variable”. The article highlights flaws in measurement systems (and sadly notes the tendency to fraud or manipulation that is further encouraged by this), but also discusses the behavioural aspects of motivation and what it is effective for individuals to focus on. The delivery of creative and complex tasks is hampered by contingent pay, and performance in areas of complexity can be limited by a narrow focus on specifically defined areas of performance (these areas are often defined only because they are the aspects that are readily definable). Furthermore, intrinsic motivation (our own internal drivers to do a good job and deliver) is crowded out by extrinsic motivation (money).

The benefit of variable incentive pay is sometimes said to be a lower cost of removing an under-performer. But this doesn’t seem to happen in practice as departing executives appear to take not just a notice period’s worth of salary but also of incentive pay. The HBR authors argue that executive pay should not include any incentive element at all, but just be on a fixed salary basis.

The point about intrinsic and extrinsic motivations is seen all around us. By defining things in financial terms we undermine other motivations, and a broader understanding of the world. Rather than enhancing behaviour, we can worsen it.

A famous example is the experiment at a group of day-care centres in Haifa which sought to encourage parents to be more prompt in collecting their children by applying fines for lateness. The result was an increase in the level of late pick-ups, not a decrease. The fee turned guilt and embarrassment at inconveniencing others into just another financial transaction, and clearly many parents simply concluded that it was a price worth paying. And once this norm was developed, withdrawing the fines did not change the established behaviour. As the authors put it, A Fine is a Price. We should be wary of putting prices on things on the assumption it will deliver the behaviours we might be seeking.

There are multiple further examples of this negative motivation arising from establishing a price for something that should not be priced. For one, Boston’s Fire Department shifted from allowing staff unlimited sick days and in fact docked pay for those taking more than 15 such days in a year. Rather than reducing sick days, this had the effect of seeing them double. And in Switzerland, the willingness to have nuclear waste repository sited locally was seen to reduce when citizens were offered compensation.

Even just a switch of language is enough. Those playing versions of ultimatum games have very different behaviours as to whether they are introduced as ‘Wall Street’ or ‘Community’ games. Perhaps unsurprisingly generosity — or rather, fairness — is reduced simply by referring to the game as a ‘Wall Street’ game. I have noted in a publication for the RSA the way in which investment training tends to override even some of our most basic tendencies; even investment-associated words seem enough to do so.

Money carries a message, and it undermines voluntary cooperation. So we need to be wary of the modern tendency to use language that renders all of us consumers of services rather than citizens and parts of communities; this framing will change our behaviours, and it is unlikely to be for the better. We are less likely to hear the motivations of fairness and more likely to focus on our own interests. Our resulting behaviour may not be what we want, and we may find ourselves operating in ways that seem contrary to many of our natural instincts, including the instinct of fairness.

I am going to finish this blog with one further example of the negative implications of the financialisation of relationships that are better if approached from a community perspective. It is an example that I feel particularly personally.

Blood donations are an area where monetary rewards have had remarkable negative consequences. For example, Richard Titmuss in The Gift Relationship: From Human Blood to Social Policy (New York, The New Press, 1997), discusses how blood donations in fact fell after payments for blood donors were introduced. But another consequence of payment is that quality may be reduced also. Only now is the Infected Blood Inquiry, under the able charge of Sir Brian Langstaff, looking into the background and impact of the use of tainted blood products in the UK in the 1970s and 1980s. One conclusion from the Inquiry seems likely to be that, as a consequence of the payment system in the US, participation in donations was higher among those at the margins of society, including drug users and prisoners, and that this led to a prevalence of HIV and hepatitis among the blood products that were imported and given to UK patients.

A good friend of mine was only a child when he was given tainted factor 8 to help treat
his haemophilia. Nearly 5000 haemophiliacs were given contaminated products, infecting them with HIV and/or hepatitis C. My friend was one of those infected with HIV, at the height of the AIDS scare, and though he lived much longer than any prediction then allowed, he is among the more than half of these people who have subsequently died.

Forgive me therefore a little sentimentalism on this issue.

Stop Paying executives for performance, Dan Cable and Freek Vermeulen, Harvard Business Review, 23 February 2016

A Fine is a Price, Uri Gneezy and Aldo Rustichini, Journal of Legal Studies, vol. XXIX (January 2000)

The cost of price incentives: an empirical analysis of motivation crowding-out, Bruno Frey and Felix Oberholzer-Gee, American Economic Review, 87 (1997)