What can O.R. do for you?

O.R. Inside Your Pay Packet

Faced with rapidly rising costs, an employer might consider a cut in pay rates. Seems a pretty rational, if harsh, reaction, doesn't it? In fact, putting O.R. inside might show that, whilst reducing pay would indeed reduce costs in the short term, it would almost certainly lead to higher costs in the long run. How come?

The O.R. inside would look at the knock-on effects of cutting pay rates. Using causal loop diagrams to illustrate the interactions between the various factors at work, and simulations of the system based on these diagrams the likely behaviour of cost over time could be estimated. The analysis would probably reveal that whilst in the immediate term costs were likely to fall, in the longer run other factors would kick in. The less competitive pay rates could lead to an increase in staff turnover. This, in turn, could reduce the level of knowledge and experience of the workforce, depressing productivity and hence pushing up costs. Replacement staff might be of lower quality, leading to a deterioration in the quality of work done and forcing costs up as faults had to be rectified and guarantee claims rose. These so-called feedback effects may be so costly as to greatly outweigh the saving from lower pay rates.

In one case, a company which had introduced a performance-related pay scheme with the intention of boosting productivity discovered to its consternation that productivity actually fell. Management's initial reaction was to tighten up the scheme, but fortunately they put some O.R. inside before going any further. This showed that once again, there had been unexpected feedback effects. The scheme was complex and produced results that were sometimes seen as unfair. It led to the replacement of a co-operative culture among the staff by attitudes such as 'I'm not helping him, because he'll get the bonus'. Staff became cynical and demotivated, and this had led to the fall in productivity. With the benefits of the understanding provided by the O.R. inside, the management abandoned their plans to tighten the performance-related pay scheme and decided to start again with a scheme designed to avoid unwanted feedback effects.

There are much more general lessons in this. Examples abound of cases where companies and governments introduce changes which seem sensible enough, but turn out to have the opposite effect to that intended, and this is often due to unforeseen feedback effects. The answer is to put O.R. inside, enabling changes to be carefully designed so as to avoid, or at least minimise, feedback effects.

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