Why Haven't They Been Fired?

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.

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.

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.

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. 🙂

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.

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

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.

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.

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.

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?

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

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.

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

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.

Instant karma has a very strong answer.

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.

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.