This article is an excerpt from the Shortform book guide to "Skin in the Game" by Nassim Nicholas Taleb. Shortform has the world's best summaries and analyses of books you should be reading.
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Why does mass employment promote inefficiency? Do you think it’s possible to completely eliminate labor market inefficiency?
According to Nassim Taleb, inefficiency at work is an unavoidable weakness of mass employment. Employees limit their freedom in order to maintain productive organizations for their employers, and what they get in return—the paycheck. However, it’s impossible to get employees totally invested in the company’s game.
In this article, we’ll discuss why inefficiency is an inherent by-product of mass employment.
Why Employees Are Less Efficient
Employees are hired to follow job descriptions, which are imperfect proxies of the company’s mission. Employees of large organizations, whether they be centralized governments or large businesses, are distanced from the consequences of their actions. Job descriptions are a way of compensating for this. Jobs are designed so that, in theory, if an employee follows the description well over a long period of time, they will be successfully contributing to the organization’s goals. However, it doesn’t always work this way.
Salary or hourly pay is doled out independently of productivity. This is an important part of the security of employment—employees trading away their freedom are primarily drawn by the promise of a steady paycheck. But this also means that employees are less efficient across the board. For example, if due to some temporary inefficiency at work, an employee doesn’t have anything to do, he’ll still get paid.
| Ingrained Inefficiency However, it can be exacerbated by a weak organizational culture. One example: This Italian hospital worker was paid for 15 years for doing absolutely nothing—a bureaucratic oversight. He told his friends he had retired and spent his days just relaxing at home (until he was caught, and charged with fraud, abuse of power, and extortion). This could only happen to an employee—a freelancer, say, a graphic designer, must be continuously generating value to get paid. However, the hospital’s lax culture was partially at fault. A degree of truancy was commonplace at the hospital—workers would frequently swipe each others’ time cards to cover for those skipping work. Six hospital supervisors were investigated for allegedly being aware this scam was happening. Even a head physician at the hospital had skipped his afternoon shifts for years without being caught. Moral norms are shaped from within groups—if the guidelines are loosened, transgression spreads. |
Employees Game the System
Employers use quantitative metrics and performance reviews to determine how well employees are fulfilling their job descriptions. However, neither of these mechanisms are perfect.
One idea that Taleb repeats is that when motivated, people can manipulate any metric. If an employee knows her reward is directly linked to a specific quota, she’ll prioritize that one aspect of her job instead of attempting to maximize overall productivity. If a high school teacher is judged by the administration purely based on her students’ standardized test scores, she may teach something closer to a test-prep class rather than something more helpful for everyday life.
Employees can game performance reviews, too. If an employee is judged by more subjective metrics, image becomes more important than true productivity. It’s become an office work cliché to try and look busy without actually doing any work.
| The Cobra Effect The phenomenon of incentives that cause unintended consequences is called the “Cobra Effect,” named after a law from British-ruled India. The British government posted a reward for cobra skins in an attempt to incentivize the extermination of venomous cobras. Instead, people began breeding more cobras in order to collect the reward.The Cobra Effect is central to Taleb’s view of the world. As we discussed, he believes that opaque, complex systems make Cobra Effects far more likely to occur than successfully implemented incentives. He argues that more skin in the game is the only effective solution to any Cobra Effect—or, barring that possibility, the lack of artificial incentives altogether. |
Employees Make Worse Decisions
Employees typically make decisions based on the impact to their jobs rather than the impact on the organization. They’re not incentivized to take risks. All employees need to do to receive their rewards is look like they’re fulfilling their job description and maintain the status quo—which is not always the correct decision.
If an unexpected situation occurs and something needs to change, but it’s not in anyone’s job description to do it, employees are likely to keep their heads down, keep doing what they’re getting paid to do, and hope someone else takes care of the problem. In this case, employees take the option that best preserves their jobs, even if it means inadvertently dooming the organization to fail.
For example, workers at the Chernobyl power plant continued to run a compromised safety test against their better judgment because they didn’t want to risk their jobs by disobeying orders. It was easier for them to believe that their supervisor knew what he was doing. This ended up causing one of the largest manmade disasters in history.
| The Dangers of Inertia Business professor Richard Rumelt’s book Good Strategy/Bad Strategy frames inertia, an unwillingness to change, as a constant force that must be battled at all times for an institution to run well. It’s almost always easier to continue what you’re doing than to critically analyze what you need to change, and for this reason, Rumelt labels inertia as one of the greatest challenges any company can face. Rumelt identifies three types of inertia that can plague your organization: “inertia of routine,” “cultural inertia,” and “inertia by proxy”—that is, your organization’s failure to change procedures, values, and clientele, respectively. In order to conquer entropy, leaders within the organization need to stay on alert for any changing circumstances and be prepared to destroy the old ways of doing things to make way for the new. |
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Like what you just read? Read the rest of the world's best book summary and analysis of Nassim Nicholas Taleb's "Skin in the Game" at Shortform .
Here's what you'll find in our full Skin in the Game summary :
- Why having a vested interest is the single most important contributor to human progress
- How some institutions and industries were completely ruined by not being invested
- Why it's unethical for you to not have skin in the game
