Tag Archives: Economics

Ministerial Pay 2012: The Neglected Truth About Incentives

There is powerful evidence that we have been completely wrong about the effectiveness of financial incentives and extrinsic motivation.

Financial incentives often improve performance. But they can also lead to unethical behavior, fuel turnover and foster envy and discontent. Wharton management professors argue that it is time to cut back on money as a chief motivational force in business. Instead, they say, employers should pay greater attention to intrinsic motivation. That means designing jobs that provide opportunities to make choices, develop skills, do work that matters and build meaningful interpersonal connections.

Knowledge@Wharton: The Problem with Financial Incentives and What to Do About It

Incentives are dangerous, and not just because people game them. They often yield collateral damage. Remember the tale of the Darwin Award winner who strapped a jet engine to his car, dreaming of a joyride for the ages, and then met his sorry end as a human flapjack on the side of a mountain? Incentives are like that jet engine. There’s no question the engine will take you somewhere, fast, but it’s not always clear where. Or what you’re going to mow down on the way. Yet incentives are still the first resort of most managers, perhaps because they all think they’re smart enough to create the perfect carrot.

– Fast Company: Why Incentives are Effective, Irresistible and Almost Certain to Backfire

Extrinsic motivation and financial incentives are culturally dominant in Singapore.

Salary.sg: Salary benchmark for ministers

The income benchmark for ministers and top civil servants is pegged at 2/3 the median income of all the top 8 earners in these 6 professions: lawyer, accountant, banker, MNC executive, local manufacturer and engineer. These means that we take the 48 top earners (top 8 from 6 groups), sort them according to their income, take the middle guy’s income, and multiply it by 2/3.

Ministers and MPs argue that they deserve to be paid as much as top earners in the private sector, but the point is that everybody in the private sector is also overpaid. This isn’t a matter of preference , philosophy or emotion- this is a scientifically established fact. Increasing pay diminishes performance. And if there’s anything we can all agree on, it’s that we all want the best for Singapore, yes?

“As long as the task involved only mechanical skill, bonuses worked as they would be expected: the higher the pay, the better the performance.

But once the tasked called for even rudimentary cognitive skill, a larger reward let to poorer performance.

– A study by economists from MIT, Carnegie Mellon and the University of Chicago, funded by the US Federal Reserve Bank

“We find that financial incentives can result in a negative impact on overall performance.”

-Economists from the London School of Economics

The highest performing people in the world are not the most paid.

I have a simple hypothesis- the founding fathers of Singapore, who everybody can agree were the most awesome team of badasses that our country has ever seen- were not motivated by money. (The Pirate Ship analogy works beautifully here.) We need a star team, not a team of stars! Lee Kuan Yew and his team of heroes were intrinsically motivated. They had autonomy, mastery and purpose.

Lee Kuan Yew, whose title is minister mentor, said naysayers like this need a reality check.

“I say you have no sense of proportion; you don’t know what life is about,” he said last month.

“The cure to all this talk is really a good dose of incompetent government,” Lee said. “You get that alternative, and you’ll never put Singapore together again.”

He presented himself as an example: “A top lawyer, which I could easily have become, today earns 4 million Singapore dollars. And he doesn’t have to carry this responsibility. All he’s got to do is advise his client. Win or lose, that’s the client’s loss or gain.”

The Straits Times newspaper quoted him as saying his current salary as minister mentor was 2.7 million Singapore dollars.

Money may buy happiness for a government minister, but some Singaporeans suggested that other motivations should also come into play for government service.

“What about other redeeming intangibles such as honor and sense of duty, dedication, passion and commitment, loyalty and service?” asked Hussin Mutalib in the Straits Times’ online forum recently.

Carolyn Lim, a prominent writer, suggested in an essay in The Straits Times that Singapore needed a little more heart to go along with its hard head. “Indeed, a brilliant achiever without the high purpose of service to others would be the worst possible ministerial material,” she wrote.

“To see a potential prime minister as no different from a potential top lawyer, and likely to be enticed by the same stupendous salary, would be to blur the lines between two very different domains.”

The minister mentor brushed aside concerns like that.

“Those are admirable sentiments,” he said. “But we live in a real world.”

The New York Times: Singapore announces 60% pay rise for ministers.

I agree completely with MM Lee Kuan Yew.

We do live in a real world. A real world where it has been proven beyond a shadow of a doubt that financial incentives decrease productivity for any task that isn’t purely mechanical.

We have to stop trying to entice people with sweeter carrots, and similarly we have to stop threatening them with sharper sticks. This turns off the our best and our brightest Singaporeans.

What they really want is autonomy, mastery, and purpose- all of which our Government, culture and systems generally fail to provide!

What Singapore needs in the 21st century is less compliance and more engagement. Before we all get obsolete.

We live in a real world. So let’s get real, take our fingers out of our ears and start paying attention to the evidence.