Bryan Caplan  

Why Haven't They Been Fired?

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The Unsung... George Selgin on "The Bernank"...
Three questions:

1. What fraction of your co-workers are paid 125% or more of their true marginal product?

2. What fraction of these overpaid/incompetent co-workers can you personally identify?

3. Has the boss failed to fire these overpaid/incompetent workers because he doesn't know what you know - or what?

Feel free to answer anonymously in the comments.  In fact, I recommend it.



COMMENTS (37 to date)
Andrew writes:

Yes, Yes and No

They keep their jobs because the cost of firing them exceeds the annual loss from keeping them.

Tis better to replace a department of mouth-breathers all at once than it is to replace them one at a time.

Les Cargill writes:

The measurement necessary to answer any of those questions does not exist. Exception - C level officers, for whom the measurement *does* exist.
Even then, C level officers can create massive negative externalities for down the road and perhaps *should* create them under certain sets of input data.

Corollary: the measurement to do this *can not* exist in any reasonable fashion.

A corporation is not a PLL.

Anonymous Nonprofit writes:

1. 20%

2. 100%

3. Several of the incompetent people are in upper management or friends of upper management. Personal relationships and signalling matter much more in a nonprofit, where I work, than in a real business and my incompetent coworkers only signal.

But never fear, the market is punishing us and we will be gone in a few years if not sooner. Even nonprofits have to produce something their donors want.

Anon writes:

A good fraction in 1 & 2.

3 - I think Andrew has part of the answer here.

I think there are other factors too. Sometimes they are just well-liked, or liked by the right people.

Sometimes it isn't a direct cost-benefit decision. For example, the manager might keep someone to maintain their 'empire.' In organizations that go through periodic reductions, managers learn to hold onto some of their MP folks. I've seen some people held onto to avoid EEOC problems (which may be the same as Andrew's answer).

Likewise, in those reductions, I've seen people let go who clearly out produced their cost, but again the cost-benefit wasn't a direct decision. They looked only at the cost and how it help achieve the savings target, and didn't consider the benefits those costs provided.

Curt writes:

In my division of a large corporation, I'd say the fraction may be 20-30%.

I think they don't get fired because:
1. Managers don't like firing people all that much - it's a stressful process.
2. If the people have been around awhile, and don't do anything particularly offensive, it's hard to justify firing unless there's a severe budget cut.
3. Managers like having a bigger staff & budget (empire-builders) even if some of their people don't do much. Very few managers would tell their boss that they could get all the work done with 80% of the people and budget.
4. It's not easy to know whether the replacement will be any better, and could be worse / more annoying.
5. While it's easier to fire when there's a management turnover, they don't reliably know who the overpaid players really are.
6. If they're currently overpaid, these workers usually do have some skills, especially talking skills, to make it appear that they are quite busy and productive.

wintercow20 writes:

Tough to answer when there really aren't readily identifiable bosses. But I'd suggest that the reason we tend to want to answer affirmative to 1 and 2 and have no explanation for three is that we don't pay close enough attention to Bryan's use of TRUE in the above.

What we ourselves think of marginal product is probably not nearly what the bosses think of as marginal product. That has to be the case in higher ed.

I'd include myself among those in the numerator for part 1, and it's not because I don't think I don't work hard.

tim writes:

Yes. Yes. No.

Failure to manage the employee.

Such as coming up with a development plan and setting expectations. And then meeting with the employee regularly and discussion progress. If failure to make any progress - then you are transferred or fired.

That all takes work and most managers don't want to do it. My manager does and he is the only manager I've worked for out of the last 43 that does. Which is part of the reason this is the 3rd time I've chosen to work for him.

Thomas Sewell writes:
1. What fraction of your co-workers are paid 125% or more of their true marginal product? 30%

2. What fraction of these overpaid/incompetent co-workers can you personally identify? 75%

3. Has the boss failed to fire these overpaid/incompetent workers because he doesn't know what you know - or what? See below.


In a large corporate environment, a manager's status (and pay, etc...) is primarily determined by:
1. Does their department function reasonably well to outside appearances?
2. How big is their budget?
3. What is their headcount?

If the question you asked was, "When presented with someone guaranteed to be more productive, would a manager replace someone less productive with them for the same cost?" then I think you'd get a different answer.

Managers of lower than marginal production workers could replace them, but they might end up replacing them with either someone with an even lower production, or with no one at all. The first case obviously isn't an improvement (even worse employee, but now with added transaction costs!) and the 2nd case hits them really hard on their status determination.

Two specific cases I can think of, highly paid employees with lots of experience, a manager tried to find an additional team member for the same job for two years before giving up on finding someone who can do the job at all for the salary range expected. Since the manager doesn't have much flexibility in terms of salary for a specific job title, it's better to leave someone in the job who can do "ok", than leave the job empty completely.

Of course, the people doing "ok" have a good thing going and aren't about to quit.

Given the incentives of the managers (bottom-line-real-profit turns out to not be as important as bureaucratic incentives and artificial metrics), many times it's perfectly rational to limit turnover to more of a sure thing.

Every company has an ROI level they (supposedly) base decisions on. It should apply to marginal decisions to cut as well as to invest. Why make a cut if you are only going to see a minor return? It's a lot of bureaucratic, morale and legal risk with a big downside compared to a small upside.

In addition, I do think there is a lot of information asymmetry between workers and management, especially with knowledge workers. Most knowledge workers can identify their peer's level of actual effectiveness, but many managers have become MBAs without direct experience and they can't identify them as readily without turning evaluations into popularity contests.

Off the top of my head opinion, YMMV. :)

anon writes:

Another factor:

The highest paid employees usually have the highest company specific knowledge (well at least a strong positive correlation). Firing them creates bigger ripples in the environment than the occasional loss of a high potential employee with lower specific knowledge.

This effect is similar to the fact that the same consultants get to come back again and again. Managers love specific knowledge since they have to manage (knowledge transfer) less.

It might even be optimal since managing knowledge transfer is hard. You need well specified procedures, documentation, ... - things not central to modern firms.

anon writes:

yes, yes, because in my field (software) the alternatives are worse. We are continuously hiring, so we would know if there were a lot of talent out there to replace our ZMP workers. I believe we keep the ZMP workers because they have some productivity (even if it is less than their paid), so they get assigned to the grunt work the more productive workers don't like to do.

Tim of Angle writes:

Since management has bent over backward to ensure that we don't know what our co-workers are paid, this is a question impossible to answer.

Jeff writes:

I don't even know what my marginal product is, much less anyone else's around here.

Jeremy, Alabama writes:

The town where I live is a surprisingly large government and military system development hub. I realized years ago that contractors (LM, Boeing etc) hire 100 people in the hope that 20 people get the work done, while with luck the other 80 don't get in the way too badly.

The actual ratio may be even more skewed than that, but this is a result of the government getting what it asked for:

- the government development methodology is so byzantine and inefficient that a large overhead is unavoidable.
- the GAO has a pay schedule that is basically a matrix of years experience vs highest education attained. Actual proven performance value to a program is not measured. In fact, "personal services" are illegal.
- the government strictly limits profitability, a lot like the way Obamacare will limit profitability of HMO's. The result is you can only make more money if you hire more people, even if they are dead weight.

There are many ways of achieving much better value, but some investigative journalist somewhere would find a "profiteering" corporation and we would soon fall back to the atrocious system that we current have.

So, I believe that government contracting is systemically 80% no-ops, 20% productive, or worse.

D writes:

There are numerous people at my job who are a net loss for the organization. I don't mean just overpaid, but rather that any company would be smart, if put in such a situation, to pay them to not to work there. These people generally have both a low IQ on top of an Axis II personality disorder (e.g., borderline personality disorder of antisocial personality traits). But since we're paid by taxpayers (no competition and no bottom line), there's not much of an incentive for their bosses to undergo the long and difficult process (required by union contract) of firing them. So they don't.

Zlati Petrov writes:

In some industries productivity comes in fits and starts (i.e. nothing comes out of a worker until he cooks up a great new way to promote a client's brand in a niche market).

So you tolerate low average productivity because you are betting on the long end of the tail of the worker's productivity distribution.

There are also social network effects: some people produce little but glue teams together just with their personality. You can't always say that a person's productivity = what he himself creates given that his contributions might be in the form of helping the team create.

fmb writes:

Sometimes I wonder if there's a quasi-rent story here. Employers and employees are essentially engaged in a partnership requiring up-front investment of some kind from both with low surplus, then, if all goes well, decent surplus that they have to negotiate over. Having an implicit contract where the normal expectation is that there's enough surplus that a seasoned employee can expect to make more than their replacement cost might be an efficient way of making sure the up front investment (e.g. in learning a role) happens.

If this is what's going on, employees will naturally be very sensitive about efforts to abscond with their quasi rents. (This may be part of the price-stickiness story.) And, employers will care about their credibility in honoring such implicit contracts.

Mostly, though, I think the more obvious stuff already discussed is the bulk of the story.

Emily writes:

1. I work in a very small business (there are only six of us), and I would say that the only person not being paid paid 125% or more of their true marginal product would be our intern that is not being paid at all.
2. They are all personally identifiable, myself included (although not the incompetent part).
3. I think that my boss has failed to fire his overpaid/ incompetent employees because he is in denial. I don't think he wants to admit his current financial predicament. Handing out bi-yearly raises to his employees is not helping his situation either. He feels attached to all of his staff and refers to us a his only family. Frankly, I don't think the problem is having an overpaid staff but having an overpaid staff while business is slow. He is suffering because he is trying to accommodate all of his employees, while the best interest of the business is set on the back burner.

SB writes:

I'd guess 30%. I'd bet I can identify 60% offhand, possibly up to 75% if I really thought about it.

I am one of the bosses in a small business who makes hiring/firing decisions. People seem more likely to cover for weak employees than tattle. For employees I don't observe directly, I usually hear about issues only when their direct supervisor is about to commit hari kari. As to why we don't can most of the ones we know about:

1. Loyalty. The CEO has personal loyalty to some long term stinkers. To some extent, the CEO may acknowledge the lack of value but prize loyalty for its own sake, and I get that (kind of). But people also don't really see the failings they have become used to in long-termers.

2. Customer familiarity. If we actually fired some of the stinkers, some customers (not a lot, but enough to make it less worthwhile) would be peeved. We are a local small business serving other local small businesses (80%+ independent contractors) in a gossipy industry (aren't they all), so being seen to act like a good industry/community citizen (including loyalty to your people) is important. Many of the customers who would be upset also complain about the iffy service they get, but no one in this business spends a lot of time dealing with rational people.

3. Neoptism. Before I came on board some hiring of the children of good employees happened, with predictable results.

4. Legal headaches. We were sued for religious discrimination by the employee we fired for trying to beat up another employee in the parking lot "to defend Jesus" and for racial discrimination for firing an employee who was stealing cash and inventory by forging customers signatures for purchases and returns (hint: that leaves a paper trail). We were threatened with a discrimination suit when we told an employee she really needed to show up for her shifts (she wasn't doing so because she had inadequate child care and we were penalizing her for being a mother, apparently). Don't get me started on the delicacies of dealing with habitual workers comp filers, or employees with medical problems that make them unreliable.

5. Unemployment insurance. You can't really fire someone for being ZMP and call it "for cause." (Well, you can try, but the argument has to be ... carefully crafted.) So, you have to continue to pay for the privilege of canning them. Since the wage/value ratio is why you are firing them, this can mess it up.

6. Training/coverage headaches. We have to be leanly staffed, so a sudden gap in staffing is a major pain in the behind (usually me, since I'm one of the few people who can actually do the job of nearly everyone we employ). Training itself isn't that hard, but they have to function independently to be really useful and getting them there (and getting us comfortable that they are there) takes some time. Covering for moderate incompetence, laziness or unreliability is a pain, but the misery, while greater overall, isn't so concentrated.

7. The options often aren't a whole lot better. I know: it's better to try a new unknown than stick with what you already know isn't working. However, it's basically necessary that our employees have worked in the industry we serve, and many of them can make better money per hour continuing to freelance. So they're often looking for part-time work to smooth their income, which is fine, but means everyone wants to work when they want and play schedule-shuffle continually. And, since nearly everyone is used to being their own boss, the ... work ethic of the pool of applicants can be lacking.

8. No one wants to be a s#*+. More relevant in a small business like this (in a large company I'd imagine managerial ignorance is a bigger factor), but, hey, it sucks to fire people, even people who need firing.

Over all, firing people is a last resort. In all honesty we try to get them to quit, or we just reduce their hours to the point that their impact on the business is minimized.

anonymous writes:

1) 20%
2) 100%
3) No. I work at a non-profit. I thought I would answer your questions more as a mental exercise for myself. What is the non-profit equivalent of marginal product? The cynic in me dismisses outright the existence of such a creature. The non-profit atmosphere is too thick with platitudes about sacrifice, mission, dedication, etc., etc. to support such a lean and mean beast as marginal product. If it does exist however, it may very well be the case that 100% of us are overpaid.

UnlearningEcon writes:

Do I get to pick option (d) Marginal product per worker is a meaningless concept because capital and labour are employed simultaneously and the product of a worker also depends on the division of labour and so individual workers cannot be separated?

Hugh D'Andrade writes:

Whatever the answers to questions one and two, the answer to question three is: What is his incentive?

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anonymous writes:

I liked Thomas Sewell's answer best. Unless they're hoping for a promotion (which most employees aren't now that working your way up through the company is becoming less and less common) managers aren't given incentive to do the best job possible. Their incentive is to do an adequate job. Trying to fine tune their employees to find the best person for the job is time-consuming and quite risky with little benefit to the manager. The worst get fired. The mediocre mull through some of the work. The best get most of the work done until they either get promoted or quit. Most of the mediocre are generally overpaid.

Sad Face writes:

He is psychologically unstable and losing the job would push him over the edge.

Silly Caplan! The government can't fire anyone. People can literally sleep at their job and retire with full benefits. If you are military and claim PTSD then being incompetent might give you 2 more years of drawing a paycheck as they evaluate your claim.

Instant karma writes:

Bryan,

It helps to apply some of the insights from Public Choice to the issue. As a manager, we often consider the cost and benefit to our selves.

The choice I always faced was what was the most productive use of my time and effort? Did I want to spend one fourth of my unallocated time helping others, solving problems, impressing superiors, etc or did I want to spend it going through six or nine months of non stop bureaucracy and daily checkpoints and write ups? Multiply this by the likelihood that you would ever even succeed in finishing the process and securing the approvals, and you can see that managers both know who the dead weight is and can choose wisely to avoid dealing with it.

There is another factor that complicates this. Employees know a lot about a manager. If you push too hard on the employee, they can push back through human resources with complaints of their own -- real or imagined. Thus the manager is always at risk of real or fabricated payback from employee. This can totally derail a career. Terminated employees can not be expected to go quietly.

Yes, managers know the majority of the low MP employees. No, they do not deal with most of them. The reasons are diverse, but in general they are optimizing their own utility.

Uriel writes:

I can talk for the department at which I work at in "government instituion" (not in the US). We are only 6 people,2 of us have a undergrad plus a masters degree (1/3); but not more than 5 year work experience in general; 3 have only a undergrad degree (1/2); but have more than 10 year experience at least over all. The other one left (1/6), has only a undergrad and not even 2 years of experience within her own area, and tadaaaa; she´s the boss.

Perhaps you are trying to gather some information for some kind of analysis, but in the case im describing here, clearly the boss is the least competent of all and she´s there just because of a political recommendation other wise by her performance I dont see how on earth she was appointed in that position...Why she´s not fired? Because politically appointed people are not evaluated by their performance but instead by what party they belong to, or who their parents are, and those sort of things.

Predrag Rajsic writes:

Of course, it is always others, and not us, that are overpaid.

Clay writes:

Typically, the only way to measure the true marginal value of anything is when there is a high volume buy/sell market that is driven primarily by market forces.

Most real world professions are extremly hard to fairly value. How do you value the labor of an industry pharmaeceutical researcher? How about a university professor where salaries and budgets are heavily tied into government grants and endowment war chests from hundreds of years of investing and have almost nothing to do with traditional consumers and income.

RGV writes:

25%

50%

Mostly because in a corporate job, the manager has greater leverage the bigger his/her team (my employer has over 100K employees). Most of the money flows in from upper management and middle management has its biggest influence in redistributing the pie, not in dictating its size.
The larger the number of people, the bigger the incoming pie, and easier to redistribute to the deserving. This makes it possible to have redundancy and maintain incentives.

Peter writes:

Let me preface this with I am Federal and the vast majority of the workers belong to a public administration bargaining unit in the organization I belong to. I do not though and am technically a manager (though non-supervisory).

Also I just want to +1 Jeremy, Alabama's answer from back in my government contracting days. This sort of behavior is all supposed to go away with performance contracts and the prohibition on personnel service contracts but in reality everybody just puts in a personnel service waiver or simply changes the language to performance based but still treats it as personal service based. Until we get rid of sole source justifications and prohibit waivers this will never change (and this is known which is why those provisions were left in the FAR).

1: 75%, maybe more as it’s hard to tell given this is skewed by many individuals getting paid 500% or more of their true marginal product. I am basing this on the fact we could easily fire 90% of our staff, hire 50% new employee's which were competent, and have no reduction in services, hell it would probably improve.

2: 25%

3: In most cases no. Boss can’t fire them because between the MSPB and NLRB it’s near impossible to fire anybody outside something like imprisonment. I have firsthand knowledge of attempts at doing so with three employee’s (two of which hadn’t even bothered to show up in two years) and each time we lost and those three employees are now being paid to “telework” full time with no expected performance until they retire short of (yes this is actually a critical performance statement in their annual review, the only one actually) “Submits timecard every two weeks for current pay period prior to pay period ending”. In some cases the attempt hasn’t been made (i.e. it would be “yes he doesn’t’ know”) but it wouldn’t change the end results. Oh yeah and those are your tax dollars hard at work.


Zubon writes:

Instant karma has a very strong answer.

unproductive writes:

as long as low-value employee is not actually disruptive, and therefore unpleasant to have around, why WOULD the manager fire them? In a large corporation I don't see there's any real incentive TO fire them.

The department has a task to do, which is being adequately delivered. some of the people in the department don't contribute but as long as they bother nobody, who really cares?

Of course if an employee is being actually disruptive or having them around is actually an unpleasant experience, then something is usually done. But if they sit quiet, well..

One day Wally will be fired, but the Pointy-Haired Boss will last forever.

Floccina writes:

In my case it is me but I am one of the owners and some of my salary is really a divided.

But a real answer might be that companies like to seems loyal so that better people want to work for them. So you keep the less productive to get more overly productive people.

Anthony writes:

In a smallish non-union firm in a cyclical business, the less-productive will be the ones laid off due to lack of work, if the manager is at all observant. But not until there's a general layoff, short of documentable near-criminal behavior, because of the direct costs, the disruption, and the effect on morale.

Advo writes:

I think the benefits of optimizing your workforce are overestimated.
Firstly, you fire a guy who is overpaid, you got to replace him. You replace him with someone you HOPE is more competent.
But you may end up with someone who is not any better than the old guy doing the job, and you sank a lot of resources into firing, hiring and training.
Secondly, you have something like a "stakeholder effect" in a company which in my view is grossly underestimated by economists (since it is very difficult to measure).
Employee loyalty is a priceless asset.
There is no substitute for it - you can provide incentives for your employees to act the way you want them to, but those are always crude instruments and never as powerful as the simple, innate desire of the employee to do the right thing, to go the extra mile because he feels as part of the group.
While firing grossly incompetent and/or malingering people is probably going to improve morale rather than hurt it, firing people - especially if they are popular - because they perform 20% below par may not be efficient because it may, on average, have a detrimental effect on employee morale.

This effect is certainly something that deserves consideration.

Max writes:
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