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The usefulness of managers

by Ace Damon
The usefulness of managers

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Is YOUR manager really needed? It is not always clear to workers how much their supervisors are contributing to the success of an organization. It may not even be clear to the managers themselves. After a long day full of meetings, many bosses must wonder what they really achieved.

Finding a way to measure the direct contribution of managers can be difficult. But Stephan Billinger and Stephen Rosenbaum, two academics at the University of Southern Denmark, made a brave attempt. Their study * used a variation of a common laboratory experiment, known as a public goods game, to test the impact of managers on worker collaboration.

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In the public goods game, participants receive a number of chips that generate a level of winnings in each round. They can choose whether or not to reinvest their earnings at each stage. All reinvested earnings are doubled and earnings split among members, regardless of whether they contributed or not. The game is a test of participants' willingness to collaborate, in a situation where some people can win for free.

The academics varied the game, dividing the group into "managers" and "workers." The managers did not manage. But they were subject to different rules. In some games they were allowed to contribute in each round, in others they were prohibited from doing so. In some versions, managers received a fixed proportion of returns; in others they had discretion about how much of the return they received. The academics compared the results with a game in which there was no hierarchy.

There is good news and bad news for those who believe that managers are important. On the positive side, contributions were higher when team members were divided into managers and workers than when they were not. The mere presence of managers, it seems, even the traditional ones, encouraged workers to collaborate.

However, managerial incentives can make workers suspicious. The end results were much better when managers were allowed to contribute than when they weren't. Understandably, workers who feel they are doing all the work are reluctant to participate.

In the same predictable way, managers react to incentives. They do it in sneaky ways. Where they were discreet about the returns they received, they made payments or tipped the rewards to the workers in the early rounds when the sums were small, thus encouraging the underlings to take risks. They then won a larger proportion of the pot in later rounds, when it was too late for the workers to react. Managers, in other words, figured out how to bypass the system and reduce workers in the process.

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Obviously, the article describes a laboratory experiment in which the gains were negligible; participants received just over $ 15 on average. But this reinforces the idea that managerial incentives can have distorted effects on business performance. This is certainly the opinion of Andrew Smithers, a British economist and author of a new book, "Productivity and the Bonus Culture." He believes that the way managers are encouraged has led to slow growth in business investment, which in turn explains America's and Britain's recent poor productivity record.

The problem, he argues, is that managers are encouraged with stock options. This encourages them to pay replacement money to investors, usually through buybacks, which tend to increase stock prices in the short term. On the other hand, the new investment tends to decrease earnings per share immediately afterwards – and with it the share price. The proportion of cash paid to shareholders by non-financial US companies was 40.7% between 2000 and 2017, when stock options became popular. Between 1947 and 1999, when they were not, they were 19.6%. As a corollary, the ratio used for investment has fallen.

All organizations need management. But when it is difficult to measure what managers do, it can be tricky to design incentives to reward them. And, as the Danish study and Smithers' work suggest, managers adopt whatever incentive scheme they offer. Managers are required. It is also necessary to watch them closely.

* Discretionary mechanisms and hierarchical cooperation: an experimental study, Journal of Economic Psychology 74

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