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Syd Weighs In

Welcome to the world of unintended consequences

About the author

Sydney is a professor of strategy and leadership, and Dean for Executive Education,  at the Tuck School of Business at Dartmouth and the author of 16 books, including Why Smart Executives Fail. Follow him on twitter: @sydfinkelstein

Be careful where you step. A simple change can bring disastrous consequences (Thinkstock)

Be careful where you step. A simple change can bring disastrous consequences (Thinkstock)

A town in eastern Canada had a problem with its municipal rubbish pickup. To complete their routes, workers were racking up overtime hours, at great cost to the town.

So the city council came up with a solution: All rubbish collectors would be paid for eight hours of work, regardless of how long it took them to complete their task. If they were done quickly, they still got the full day’s pay. If they took longer, they got the same eight hours pay.

What do you think happened?

Not quite what the city council was hoping for. First, complaints went up, as some rubbish didn’t always make it into the truck as workers hurried from house to house. Then, speeding tickets increased, as did traffic accidents, as trucks rolled down the road driven by workers motivated to get the job done as fast as possible. 

Welcome to the world of unintended consequences. For every great plan, there are unforeseen events, mishaps and sometimes a result that is completely opposite to intentions.

Unintended consequences are the third rail of management. No matter how seemingly sensible our intentions, unexpected things will happen, almost all of the time. It’s up to smart managers to think and rethink, to avoid the biggest blunders. It’s a bit like the Hippocratic Oath, the first principle of medical ethics: do no harm. When we change the rules for how people work, we should be sure not to mess things up even more.

Easier said than done.

Problem: Medical residents are working excessively long hours, compromising medical care and even creating medical problems for the residents themselves.

Solution: Cut back on hours.

Reality: The source of many medical errors is the “handover” between residents or physicians, when the outgoing resident transfers key information to the incoming shift. With shorter shifts, you inevitably get more handovers and with more handovers you get more mistakes. How could that be? Shockingly, doctors are not much better at communicating during handovers than they are at other times, leading to incomplete information-sharing on patient status.

In fact one recent study indicated that residents who worked shorter, 16-hour shifts actually reported making more medical mistakes than residents who worked 24 hours.

Tight budgets complicate matters further. Just because residents are working shorter shifts likely doesn’t mean you get to add more residents. So, much the same work completed in a 24-hour shift now gets packed into 16 hours.

But surely these problems are exclusive to politicians and medical associations, right? It would appear that a link to major corporations would be tenuous, at best.

Think again.

As a PhD student in the 1980s I was assigned to read corporate proxy statements to learn more about how much, and how, senior executives were paid. Proxies were required to identify the top five most-highly paid managers in a company, which I usually found in an easy-to-read table listing salary, bonus and stock options.

Try doing that today. The simple table is long gone, as pressure for better disclosure has given rise to reporting of numerous columns of data on such things as restricted stock, performance units, supplemental grants, post-employment compensation and even such quaint artefacts of a bygone era — salary and bonus.  Then there’s a separate table for stock options (granted, exercisable, timing, exercise price, etc.), as well as a list of peer companies so shareholders have a relevant point of comparison.

While the purpose of all this additional reporting was ostensibly meant to provide better data to shareholders about the companies they own, it also turns out to have an unintended consequence. And it’s one that is hardly favourable to these shareholders: CEO and other executive compensation have skyrocketed over time. For example, CEO compensation has increased by 725% over the last 30 years in the United States. In Germany, pay has gone up 350%.

Laying bare the many forms of compensation accruing to CEOs has not reined in giant pay packages, but rather has done quite the opposite. It turns out that when data on compensation is openly available, it’s easier to compare what other CEOs are earning to what you’re getting. Since no one believes they should be underpaid, there is a natural ratcheting up of pay.

This is also true when you look across countries. The pay premium earned by US CEOs relative to their brethren in other developed countries declined in the 2000s, a period that corresponds with the adoption of new disclosure rules by a number of European Union countries like the UK, plus Norway and Switzerland. From 2003 to 2007, for example, the US pay premium (relative to other countries) dropped from 58% to 2%. The more boards and CEOs are aware of what others are getting paid, the more they will be motivated to ensure their own pay matches the going rate, apparently even across continents.

Is it possible that better disclosure is associated with an increase in CEO pay? How else to explain how the compensation of CEOs in Canada has moved in lockstep fashion with the availability of more information on pay to boards of directors who are charged with setting pay?

Changing the rules that govern how people do their jobs — whether it is collecting trash, interning as a medical resident, or determining CEO compensation — turns out to be a risky proposition.

The next time someone suggests doing so at your organisation, remind him or her of the Hippocratic Oath. And then get ready for turmoil.

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No matter how seemingly sensible our intentions, unexpected things will happen, almost all of the time.