Week 3

By the latter-half of the 19th century it had become clear there was a need to systematize managerial practices

The rise of mass production processes: capital, materials, and energy-intensive processes were also management-intensive

First systematic general management text was Henry Fayol’s (1917)

Early 20th C: Question turned to how to motivate people

“Securing cooperation is the consummate and enduring problem for business” (Willman, 2014)

Engineers became a prime source of information about management practices

Taylor was to build a famous theory based on his own work experience

At first these approaches led to huge gains in output.

From an upper middle-class background (his father was a Princeton-educated lawyer).

Instead of going to Harvard he became an apprentice machinist, working on the shop floor of the Midvale Steel works.

Quickly promoted to the foreman, research director and finally chief engineer of the works. (He was talented + his family knew the owner)

Taylor recognised the problem that workers were ‘shirking’ (an early Agency Theorist?)

He began to analyse the productivity of both the men and the machines.

Always an engineer he invented many techniques and patents and became a wealthy man.

Why we study it: Scientific Management was one of the earliest management approaches to apply scientific principles to management.

Many of its themes are still influential.

1. That workers fear that if they increase their output, jobs would be lost.

2. That workers protect their own interests by ‘soldiering’. This is due to:

“Natural soldiering” - our natural inclination to take it easy

“Systematic soldiering” - when workers believe there is no point being faster as they will not be paid anymore (even with a piece rate, employers will just lower piece rate).

3. That workers use inefficient methods as they do not know any better. Here he advocates the use of scientific principles (i.e. time and motion studies) and managerial control.

Taylor described how between 1898–1901 at Bethlehem Steel he had motivated Schmidt to increase his workload from carrying 12 tons of pig iron per day to 47 tons

“Schmidt started to work, and all day long, and at regular intervals, was told by the man who stood over him with a watch, 'Now pick up a pig and walk. Now sit down and rest. Now walk — now rest,' etc. He worked when he was told to work, and rested when he was told to rest, and at half-past five in the afternoon had his 47 tons loaded on the car. And he practically never failed to work at this pace and do the task that was set him during the three years that the writer was at Bethlehem Steel. And throughout this time he averaged a little more than $1.85 per day, whereas before he had never received over $1.15 per day, which was the ruling rate of wages at that time in Bethlehem, Pennsylvania. That is, he received 60 per cent, higher wages than were paid to other men who were not working on task work. One man after another was picked out and trained to handle pig iron at the rate of 47 tons per day until all of the pig iron was handled at this rate, and the men were receiving 60 per cent. more wages than other workmen around them.”

(Pearson, 2012, The Rise and Fall of Management)

Marx argued that, due to the logic of capitalism, worker and employer interests were fundamentally in conflict.

Taylor argued that the prosperity for the employer cannot exist in the long term unless it is accompanied by prosperity for the employee (and vice versa)

What the employee wants is high wages, what the employer wants is a low labour cost.

Taylor thought that with SM you could get both. Productivity was all. Management needed to train and develop each individual so that he can do the best work for which his natural abilities fit him.

“The principal object of management should be to secure the maximum prosperity for the employer, coupled with the maximum prosperity for each employee” (Taylor, p.9).

Marx understood “the endemic antagonism between boss and worker as the product of an economic logic built around inexorable competition among profit-seeking firms” (DiMaggio 2001, p.10).

1. Replace rule of thumb methods with a method based on the scientific study of the tasks

2. Scientifically select, train and supervise workers rather than leave them to passively train themselves

3. Provide detailed instructions and supervision of the work

4. Divide the work equally between managers and workers so that managers plan/ design the work and workers actually perform the tasks.

(no explicit mention of pay for performance in 1923 reading chap 1 - but this was an important aspect of Taylor’s approach)

Modern Times (1936): Here Charlie Chaplin works on a factory assembly line where he suffers greatly due to the stress and pace of the repetitive work. He eventually suffers a nervous breakdown and runs amok, getting stuck within a machine and throwing the factory into chaos; he is then sent to the hospital. He then suffers many madcap adventures, eventually getting the girl - but both set off into a very uncertain future.

The film has won many awards and honours (selected by the Library of Congress as one of 25 films for being culturally, historically or aesthetically significant’.)

1. Deskilling & Dehumanisation

Destroyed craft skills and reduced workers to "semi-automatic attachments to machines"

Treated workers as machines, not people - ignored psychological and social needs

2. Worker Exploitation

Wages lagged behind productivity gains - management captured most efficiency benefits

Accelerated work pace caused exhaustion and "premature old age"

3. Loss of Autonomy & Democracy

Removed all worker discretion and judgment

Anti-democratic - no worker voice, all power transferred to management elite

4. Strong Labour Opposition

Led to strikes (Watertown Arsenal) and widespread union resistance

Hoxie Report (1915): Found practice fell short of theory, especially in time studies and task setting

Thompson Report (1917): 30% complete failures of 113 factory applications

5. Not Truly "Scientific"

Time studies were often arbitrary and manipulated by management

More political philosophy disguised as science than objective truth

Workers resisted Taylor’s ideology

They saw Taylorism as a way to deskill, restrict autonomy, reduce status, accelerate the pace of work, lower wages, treat them as machines not people

Job specialisation restricted discretion of those at the bottom and transferred the power to those at the top

Reduced the costs of wages and training, lowering and homogenising skills and so increased the bargaining power of managers

Specialising tasks made it easier to measure individual performance and to motivate workers with productivity wages.

The result:

The Watertown Arsenal strike & the Hoxie report

Taylorism with assembly lines setting the pace.

Rigid standardisation of product, process, component and labour.

De-skilling and simplification of labour to the point of automation.

New system was much more productive. But Ford thought it could be higher.

Productivity study: 2 key factors

Daily absences 10%. Turnover was 370%.

Ford concluded to fix his plant he had to fix his labour problems

Hence: the famous $5 day

Shift from engineering approach to focus on psychology

The Taylorist approach to increasing productivity:

1. Break down complex jobs into simple ones

2. Measure everything

3. Link pay to performance

   
   

Digital Taylorism:

Starts with the three basic principles, but supercharges them

Applies them not just to traditional manufacturing jobs but also to managers and service/ knowledge workers

A modern version of “scientific management” threatens to dehumanise the workplace

Significant influence on management practice in the US, UK, France, Germany, Japan and the Soviet Union, especially pre-WW2.

Thompson report (1917): of 113 factory applications, 59 successful, 20 partially successful, 34 failures.

Nelson’s study (1974): strong positive correlation between scientific management and efficiency.

Had major impact on the development of new methods in accounting, business planning and management consulting.

However: Widely disliked by organised labour (e.g., Hoxie report, 1915, argued that practice often fell short of theory, especially in areas of time study and task setting; decline of craft roles; negative impact on industrial democracy).

There was to be a shift from an engineering approach to a focus on psychology

These started as experiments in scientific management

Western Electric: manufacturing unit of AT&T

Hawthorne, Illinois works of Western Electric

A massive plant – By 1929 40,000 men and women worked at the plant

Western Electric was one of the forerunners in applying scientific management to its production units

Enlightened employer

A series of behavioural experiments undertaken at Western Electric’s Hawthorne Works between 1924-1932. Experiments on productivity enabled through partnerships among industry, universities, and government (National Research Council, The Rockefeller Foundation, MIT and Harvard).

Key people: Mayo, Roethlisberger, Whitehead, Dickson

1. Illumination study (1924-1927)

2. Relay-assembly test room studies (1927-1932)

3. Bank wiring observation room study (1931-1932)

4. Interviewing program (1925-1932)

1: Illumination tests, 1924-1927

Ambiguous findings of effects of task lighting on productivity

-> The first and most cited experiments were the three “illuminations experiments”. They found no relation between lighting and production. (The dv was the number of telephone relays that workers (in this case only women) assembled.

2: Relay tests, 1927-1929

Experimental alteration of bonus arrangements, rest periods, hours of work in a self-selected team

Output rose with each treatment, giving rise to what has come to be called the “Hawthorne effect”

Impact of pfp: findings indicated a large effect – but scholars denied that conclusion

-> In the first ‘Relay assembly test room’ five women were selected to assemble telephone relays under the surveillance of researchers. They manipulated work pauses and the duration of work in an uncontrolled and scientifically unsound manner. They dismissed and replaced operators (Mayo said in a letter that one operator was dismissed because she had gone ‘Bolshevik’), there was no control group.

In a second relay assembly room test they looked a the impact of payment on performance. Finding indicated a large size effect in this case – however the scholars involved, especially Roethlisberger and Dickson denied that conclusion and attributed the measured payment-output relation to their assumption that the operators just wanted to challenge a piecework record of the operators observed in the first relay assembly test room.

Nest researchers analysed the ‘Mica splitting test room’ data, to measure the effect of rest pauses and extra hours on performance. Again Roethlisberger and Dickson drew arguably the wrong conclusions and identified an apparently steady rise in performance and said this was due to high morale

3: Bank wiring room experiments

Observational studies revealed output restriction in certain circumstances (i.e., productivity decreased)

Interviews on attitudes to work revealed ‘cliques’ enforcing output norms (reducing both under- and over-producing)

-> the ‘Bank Wiring room’ where (make) operators were observed in order to see if there was a form of tacit collusion among the workers not to work too slowly or too fast.

4. Large scale interview programme

Researchers inclined to psychological explanations to explain performance effects (workers actually considered pay to be the most important).

-> From 1928 a large-scale interview programme was carried out (over 21K workers). By this time the researchers were inclined towards psychological explanations to explain performance effects. They drew attention to the importance of social aspects of work organisation. However, the workers interviewed actually considered pay to be the most important.

“Any company controlling many thousands of workers…tends…to lack any satisfactory criterion of the actual value of its methods of dealing with people”.

Elton Mayo, 1944

“There is the feeling that better output is in some way related to the distinctly pleasanter, freer and happier working conditions”

Research Report

Output not satisfaction is key dependent variable

However, economic outcomes downplayed

Managerial technique not social movement

(And an awful research design)

Their findings:

1. Worker satisfaction is related to interest shown in them, the social aspects of work, and ‘belonging’.

2. There is an unwritten ‘understanding’ between organisations and their employees about mutual expectations; Mayo called this the psychological contract. These include mutual respect, security, and recognition.

3. Work is a group activity, with formal and informal organisation each playing a part in shaping attitudes and actions.

1. Organisations are social systems

2. Technical skills are not enough

3. Managers require diagnostic skills in understanding human behaviour…

4. …also inter-personal skills in counselling, motivating and communicating

5. “Leadership” enters the management lexicon

-> Also… the Hawthorne effect – you cannot observe a social phenomenon without affecting it in some way

Lincoln Electric started in 1895 in Cleveland by John Lincoln

Makes welding equipment and has a long history of financial success.

Very well known for its incentive system which provides very strong individual incentives (piece rate) combined with an annual bonus that averages 100% of annual salary and guaranteed employment

A synthesis of Taylorism and HRM?

Work performance is a function of a number of variables (ability, work opportunity, corporate performance and your motivation)

To be motivated means to be moved to do something – to be energised or activated towards an end

Motivation commonly regarded as combination of intrinsic and extrinsic motivation

Intrinsic motivation: doing something because it is inherently interesting or enjoyable

Extrinsic motivation: doing something because it leads to some separable outcome

To motivate employees to act in the best interest of the firm can involve a variety of incentives

Not all of which have to be financial (praise, status, thanks, can all go a long way)

BUT: Evidence everywhere that we respond – strongly – to financial incentive

For the purposes of this lecture, I am going to focus on extrinsic motivation (pay for performance)

The Agency relationship is where one party (the principal) delegates work to the other party (the agent) who performs that work

It is concerned with resolving two problems:

1. The problem that arises when the desires or goals of the principal and agent conflict

2. It is difficult or expensive for the principal to verify what the agent is actually doing

Has been applied, in particular, to the relationship between senior managers of the firm (the agents) and the owners/ shareholders of the firm (the principals)

But also applies to the manager/ subordinates in terms of quality and quantity of work

The issue is how to design the relationship to motivate the agent to act in the principal’s best interest

Lazear (2000) found that productivity increased by about 44% when the firm switched from paying by the hour, to paying piece rates.

Incentive effect: Half the gain from employees working harder

Sorting effect: Half the gain from the plan attracting a more able workforce

-> Why might it be difficult to apply this to other work contexts? What do you think?

Tournaments as contests in which actors compete for a prize that is awarded based on relative rank (rather than absolute levels of output).

Designed to motivate effort through the competition to win the prize (e.g. promotion)

The prize is optimal when it maximises the productive output of the tournament, including all participants.

If the prize spread is too small, contestants are not incentivised to compete (so total productive output of the tournament drops).

The theory rests on the (economic) assumptions of rational actors, who seek to maximise individual utility.

“the salary of the vice president acts not so much as motivation for the vice president as it does as motivation for the assistant vice presidents” (Lazear, 1998, p.226)

Tournaments, or rank order tournaments, as an efficient way to pay employees was a theory proposed by Lazear & Rosen. It looks at the impact that large pay differentials have on employee behaviour.

The basic idea is that creating a tournament structure for pay can be a very effective way to motivate effort, as it encourages all employees to work hard to win the prize.

This is in contrast to standard economic theory which would assume that no one can be paid more than the value of their marginal productivity.

In contrast in a tournament it can be efficient to pay people at the top more than the value of what they add, because it incentivises those beneath them to compete for the prize.

Tournaments with very big differentials between grades is a pronounced feature of executive pay.

Rank order tournaments can be superior to PfP compensation mechanisms because they motivate a broader base of employees who strive for promotion rather than focussing on a single individual.

Tournament results are determined by outcomes rather than processes, which is why they reduce monitoring costs. Thus tournament structures are more appropriate when it is hard or expensive to measure individual performance accurately, but easier to measure rank.

BUT: Tournaments seem less useful when cooperation is needed for interdependent work situations. It may also be less well suited to motivate effort over the long haul.

Tournament theory brings attention to the importance of career structures.

The “prize” of promotion is often a far more important driver of motivation than other short-term forms of incentive pay.

The most effective goals were:

Specific (“Do your best” too vague)

Difficult (but not impossible)

Performance must be controllable, and the goal not impossible.

Moderators:

Feedback: helps to track progress

Goal commitment: acceptance

Skill: can’t attain goals if you don’t know how

Key insight: Goals improve performance – even in the absence of monetary incentives

Subtext:

Latham and Locke (2018) describe some of Latham’s early research involving tree harvesters. In a field experiment they randomly assigned pulpwood crews (who were harvesting trees) to two different conditions:

In one condition they were told to “do their best”.

In the other condition they were assigned a specific, high productivity goal.

In both case they were paid on the basis of a piece rate basis.

Results: From the first week, and throughout the three months of the experiment, those in the “goal condition” outperformed those in the control treatment. “The goals provided the crews with a purpose, a sense of challenge, and feelings of accomplishment for otherwise tedious work.” In addition to the improvements in performance, attendance also increased.

The management of the company where this research was carried out, expressed surprise that something as simple as setting goals would have such an important effect, and asked doesn’t everyone set goals? Latham replies that yes, but normally they are much too general or vague and so have little effect on behaviour.

In subsequent work they found that crews that participated in setting performance goals had the highest productivity.

Further research found that goals improve performance even in the absence of monetary incentives.

Participative v assigned goals

The evidence complex, but they found that as long as the rationale or logic for the goal was provided, and that the goal was not assigned in a curt manner that an assigned goal was as effective as a participatively set goal.

SMART

This comes from a 1981 paper by Doran:

Specific, measurable, assignable, realistic, time related.

Other versions have substituted achievable or attainable, and relevant and time bound. Note L&L specifically say that goals must be difficult.

BUT: Do your best may be better than a specific but mis specified goal.

Objectives and Key results

OKRs comprise an objective (a significant, concrete, clearly defined goal) and 3–5 key results (measurable success criteria used to track the achievement of that goal).

People respond to incentives

For better or worse you get what you get what you measure and pay for

Roberts (2010) “designing useful incentives inside organisations is often very complicated and designing ones that are both useful and strong is often impossible”

Often the best incentives are weak ones

Pay for performance bonuses seem to make a lot of sense.

Most people in principle think pay for performance (of some type) is a good idea in theory…

But Netflix does not. Why? What do you think?

1. Where good measures of the agents’ efforts or performance are not available

2. When good measures are available for particular activity, but multi-tasking is desired and there are not good measures for the other desired activities

3. When cooperation among different agents is desired

4. When it is important to encourage experimentation

5. When it is important to induce obedience from agents who disagree with the principle about the right course of action