[Smart Economics] Qualifications for an Excellence Award

There are two middle school students, A and B. Both are studying hard ahead of their final exams. Student A studied for ten hours and scored 90 points. Student B studied for the same amount of time but managed only 70 points. If you were to give an honors award to one of them, who should receive it? You might well ask why this is even a question. In a school setting, the honors award would of course go to Student A, who earned the better grade. Student B, who studied for the same amount of time as A, might possibly receive an award for effort. But an honors award would be out of the question.

Even in educational institutions like schools, honors awards are given based on ability, not effort. To put it simply, the College Scholastic Ability Test, which nearly all high school students across the country take, evaluates ability, not effort. Yet once this otherwise obvious principle enters the world of labor, the situation changes. This is the logic of “equal pay for equal work.” It holds that if the amount of labor put in is the same, the compensation should also be the same.

Equal pay for equal work is wrong

At first glance, the idea that the same work should receive the same pay may sound reasonable, but it is not. Compensation should be based not on input, but on output. It is no different from an honors award being given based on grades rather than hours spent studying. If someone works hard but produces no results, it is only human to feel sympathy. But if compensation is provided in every such case, then our society’s system for evaluating performance would collapse.

Nevertheless, in labor circles, the logic of equal pay for equal work is treated as if it were sacred and unquestionable. It is striking that the labor movement’s way of thinking is even more regressive than that of the education system, which does not reward students equally just because they studied for the same number of hours. In school, one might at least say that both process and outcome matter because of the purpose of education. But in the world of business, where competition is fierce and survival is at stake, why should such complacent thinking prevail?

In professional baseball, a .300 hitter and a .250 hitter do not receive the same salary. That remains true even if both players complete the same winter training, play in the same number of games, and even step up to the plate the exact same number of times. They may or may not have performed the same amount of labor, but they did not deliver the same value or utility to the team and its fans. If people were rewarded more simply for studying longer or training longer, then students would stop trying to do well on exams and athletes would stop trying to win games. They would merely remain in the classroom or on the field for longer. After all, if rewards rose automatically just for enduring there, why strive for actual results?

Come to think of it, our society seems overly steeped in egalitarian notions. The nasty old proverb, “If your cousin buys land, your stomach aches,” may well have come from such a mindset. If a cousin worked hard and increased his wealth, that should be something to congratulate as a relative, not something to resent. Is that not simply mean-spirited? Perhaps after living huddled together on the Korean Peninsula for 5,000 years, we have become unable to accept anything different from ourselves. As this way of thinking has been accepted by the public without criticism, more and more people now feel bitter not only when a cousin gets into a prestigious university, but even when a cousin gets a raise. But this is the point at which we should ask ourselves: just because everyone completed the same elementary, middle, and high school curriculum, should they all attend the same university? Just because they have the same years of service or have worked the same number of hours, should they all receive the same wages and all be promoted together?

If we are going to discuss fairness in compensation, it would be more appropriate to speak of “equal pay for equal performance” rather than “equal pay for equal work.”

Incentive systems should be introduced only after assessing their effects

To move people’s hearts, guide their actions, and achieve desired results, appropriate and sufficient incentives are essential. However, if incentives are to be used in ways suited to their purpose, it is necessary to determine whether an incentive system is actually effective and to incorporate that judgment into the compensation structure. As capitalism has developed and evolved, incentive systems have developed alongside it. That is because incentives help unleash human passion. But incentives must be applied differently depending on the nature of the work. One cannot guarantee that applying the same incentives will produce the same effects. For people such as athletes or chief executive officers (CEOs), incentives are highly effective. The gap in performance depending on individual effort and choices is large, and profits and losses differ clearly according to results.

By contrast, in simple industries, the effect of incentives is relatively small. Many people do similar work according to a given method of operation, so performance gaps tend not to be very large. In such cases, it is more rational to provide workers doing similar jobs with pay at similar levels than to adopt contracts with stronger incentives.

In this way, the use of incentive systems should vary according to differences in their effectiveness. Poorly applied incentive policies do little to improve productivity. Even within an equal pay for equal performance framework, it is necessary to use incentives appropriately.

△ Please remember

At first glance, the idea that the same work should receive the same pay may sound reasonable, but it is not. Compensation should be based not on input, but on output. Just because everyone completed the same elementary, middle, and high school curriculum, should they all attend the same university? If we are going to discuss fairness in compensation, it would be more appropriate to speak of “equal pay for equal performance” rather than “equal pay for equal work.”

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: [스마트 경제 읽기] 우등상의 자격

Author: Sung-no Choi

Date: 2021-04-19

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=4&idx=23634