[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

machines have one advantage over humans: except when they break down, they do
what they are told. Workers, in contrast, have to be motivated if they are to work
hard and to exercise good judgment.
This requirement can be viewed as an information problem. In the basic competitive
model of Part Two, workers were paid to perform particular tasks. The employer
knew perfectly whether the worker performed the agreed-on task in the agreed-on
manner. If the worker failed to do so, he did not get paid. The pay was the only form
of motivation required. But in reality, workers frequently have considerable discretion.
And because employers have limited information about what a worker is doing
at each moment, they have to motivate members of their workforce to exercise their
abilities to the fullest.
To motivate workers, employers use both the carrot and the stick. They may
reward workers for performing well by making pay and promotion depend on performance,
and they may punish workers for shirking by firing them. Sometimes a worker
is given substantial autonomy; sometimes she is monitored closely. The mix of carrots
and sticks, autonomy and direct supervision, varies from job to job and industry
to industry. Among other factors, it depends on how easy it is to supervise workers
directly and how easy it is to compensate workers on the basis of performance.
PIECE RATES AND INCENTIVES
When the pay of workers increases for higher productivity and falls for lower productivity,
they will have appropriate incentives to work hard. The system of payment
in which a worker is paid for each item produced or each task performed is
called a piece-rate system. But relatively few Americans are paid largely, let alone
exclusively, in this way. Typically, even workers within a piece-rate system get a base
pay plus additional pay, which goes up as they produce more.
Why don’t more employers enact a piece-rate system, if it would improve incentives?
One major reason is that piece rates leave workers bearing considerable risk.
A worker may have a bad week because of bad luck. For example, salespeople, who
are often paid commissions on the basis of sales—a form of piece rate—may simply
find little demand for their products, no matter how hard they have worked.
A firm, by providing a certain amount of guaranteed pay, gives the worker a
steady income and reduces the risk she must bear. But compensation that is less
dependent on a piece rate gives the worker less incentive to work hard. There is
thus a trade-off between risk and incentives. Compensation schemes must find some
balance between offering security and offering incentives linked to worker performance.
In many jobs, employers or managers achieve this balance by providing both
a guaranteed minimum compensation (including fringe benefits) and bonuses that
depend on performance.
A second reason that more employers do not use piece-rate systems is their
concern for quality, which can be difficult to measure even when the quantity—
say, the output of workers on an assembly line—is obvious. If pay depends just on
the number of items produced, the worker has an incentive to emphasize quantity
over quality. The result may be less profitable for the firm than a lower level of
higher-quality output.
MOTIVATING WORKERS ∂ 365