Editorial: Systems for rewarding employees can sometimes lead to decreased productivity

Compensation-and rewarding excellent employees in general-is an important issue for all organizations to address. As the chairman of a department with roughly 800 employees (MDs, PhDs, RNs, MBAs, technicians, administrative staff, etc.) including about 130 faculty, and being part of a university with tens of thousands of employees, I spend a significant (many chairpersons probably would say excessive) amount of time considering the salary and benefits available for people for whom I consider myself to be responsible.

In a purely patient care-focused practice, a measure such as relative value units or collections might be used as the straightforward measure by which compensation is allocated. But academic departments have multiple missions-patient care, teaching, and research-and excellence in these areas may be challenging to measure and to reward in a manner that all perceive as fair.

One issue that compensation systems must address is if, and how, to reward longevity within the organization. This was the topic in a recent issue of The Economist. According to this publication, a system designed to reward time of service with a company accounts for the failure of many Japanese firms to succeed: "One reason why Japanese managers fail to strive for better corporate performance is that they lack the incentive to do so. Blame this on Japan's 'seniority-wage system.' Employees receive low salaries early in their careers in return for job security and a big payout in their final years. Tenure, not performance, determines what they take home. This system provided stability during the postwar period, when a booming Japan was rebuilding itself.

Nearly everyone is aware of Jack Welch, the former chief executive officer of General Electric, and his obsessive emphasis on differentiation of employees and compensation. According to Welch, 10% of employees are truly outstanding, and should be rewarded accordingly. Seventy percent of employees are performing as they should and should receive the compensation and increases that are roughly considered average. The bottom 20% should be told to improve quickly, and, if they fail to do so, their employment should be terminated. According to Welch, pay increases are appropriately tied to performance and not age, and tenure should not exist in the business world.

When considering incentives in a clinical practice, many consultants believe that the amount of "at-risk" compensation needs to represent at least 30% of the total to be meaningful. If an employee, by working harder and contributing brilliant ideas to improve the organization, only can influence his or her compensation by 10% or so, then he or she will not believe that the extra effort was recognized or rewarded. Stellar contributors, according to Welch, will leave out of frustration or will cut back on their effort.

Academic departments in most universities, to the amusement and ridicule of many of my friends in the private sector, do offer tenure. My understanding is that this practice started centuries ago in England to prevent political or religious authorities (and, in a famous case, the Archbishop of Canterbury) from outlawing the teaching of truth by college professors when that truth challenged orthodoxy.

Today, tenure typically represents the university's promise of employment and a comfortable salary for life-a truly remarkable perk. The negative press associated with tenure comes in those (relatively rare, I believe, but often highly visible) instances in which tenured faculty no longer work hard to serve the university and its mission. Tenure has its strong supporters to this day, but I can assure Ophthalmology Times readers that not once, in my 10 years as department chairman, has the Archbishop of Canterbury tried to exert his influence to get any of my faculty members fired. In some ways, the tenure system in academia today resembles the Japanese seniority wage system of which The Economist is so critical.

Younger employees who are saddled with student loans (today averaging about $200,000), starting families, and trying to purchase homes at today's still-inflated prices presumably would resent a system that underpays young workers relative to older workers for the same unit of work. They may desire a system in which compensation is tied to productivity, so that they can directly determine how much they get in the bimonthly pay envelope.

On the other hand, organizations benefit from and presumably should reward employee loyalty and the resultant stability. So what should ophthalmology departments and group practices reward with their compensation systems: productivity or longevity? According to my college-sophomore daughter, the answer is "both."

References

1. Corporate governance in Japan: A few signs of progress in Japan; but it must let young workers compete with older ones. The Economist. May 31, 2008:14.

2. Welch J. Jack: Straight From the Gut. 1st ed. New York: Warner Books; 2001.

Peter J. McDonnell, MD is director of Wilmer Eye Institute, Johns Hopkins University School of Medicine, Baltimore, and chief medical editor of Ophthalmology Times. He can be reached at 727 Maumenee Building, 600 N. Wolfe St., Baltimore, MD 21287-9278, Phone: 443/287-1511, Fax: 443/287-1514, E-mail: pmcdonn1@jhmi.edu