How to Pay professional Employees
post # 227 — October 31, 2006 — a Managing post
An accounting student writes in to ask:
I interned with an accounting firm that paid everyone (except for partners) by the hour. Under this system employees made a lot of money during tax season. People seemed to work much longer hours than at another firm I had worked in which paid straight salaries. It really did not seem they had so much more to do, but time-and-half wages were a huge opportunity cost of going home. â€œTime-in-seatâ€ seemed to be a motivation which could only lead to a lack of efficiency.
I donâ€™t blame the firm on this oneâ€”a lack of efficiency seems to be a fundamental problem with billable hour work in general because more hours translate to more pay. I canâ€™t blame the employees eitherâ€”why not use this incentive structure to their advantage? The partners encouraged people to work as much as they wanted.
At school, we studied a manufacturing company (Lincoln Electric) which pays its workers a piece rate. Lincoln requires a quality standard for each piece (no pay if the standard isn’t met and the employee has to fix things up on his/her own time). Teamwork is factored into a score that determines bonuses at the end of the year (and importantly, employees are held to the teamwork and other requirements). With year-end bonuses having the potential of 100% of the whole yearâ€™s wages, the employees take these rules seriously.
Obviously, you canâ€™t really pay piece rate for a tax return (and Iâ€™m not even sure you would want to). Paying by the hour must inevitably put dollars ahead of excellence (at least slightly. Paying a salary currently seems like a best bet.
How should employees be compensated?
The Lincoln Electric case study is very famous in business schools, but Iâ€™m not aware of any professional firm that uses piece-rate wages for its employees. Does anyone else out there know of an example?
As a lot of people have discussed, paying people by the hour builds in lots of discincentives and poor behavior. Nevertheless, many firms do this, even if it is only in the aggregate form of paying bonuses annually for those juniors with the most billable hours.
I think this is a terrible system because junior employees donâ€™t really get to control their own workload. Itâ€™s a partner who decides whether or not give a piece of work to junior person A or B. So getting more billable hours may just be a matter of being chosen more often. (Although you could argue that such a system serves as a quality screen — only the good juniors will be sought out by the partners who allocate work, so they will end up busier.)
There have been some firms that create a â€œfree marketâ€ for work allocation — to get assigned to a job, juniors can offer to work for a discount off their salary, and partners can pay a premium over normal salary rated. That way, partners only sought out either the :bestâ€ for their jobsâ€ or the cheapest internal resources for the basic work. I know firms (elite firms) where this lasted a long time.
In spite of its creativity, Iâ€™m against such models. All quantitative incentive schemes backfire (weâ€™re dealing with smart people here!) Ultimately, I think you have to do what Alfie Kohn said â€œPay people well (a salary) and work like mad to get them to forget about the money.â€ If you want them to work to higher quality, more collaboratively, with higher productivity, then you must MANAGE them to accomplish this. You canâ€™t just design a scorecard and then say â€œgo!â€
One thing in the Linoln Electric system is worth contemplating. A significant annual bonus for everyone based on company results and teamwork makes a LOT of sense to me.
Anyone else got different views?