Tuesday, October 23, 2007

The Business Model

Uncle Joel Klein, the man who couldn't do to Microsoft what European antitrust regulators could do (i.e., beat them completely in an antitrust case), writes in today's NY Sun that "pay for performance" is the way teachers should be compensated.

Uncle Joel uses "business" as his model for how to make public education better and schools more successful. He says in business, the following are everyday ideas:

1. Successful firms pay more for what's worth more

2. They create incentives that motivate employees to work harder and more effectively

3. When they're failing to produce results, they shut down.

He says in public education, these ideas are "foreign," and life-tenure, lock-step pay, and seniority rules "stifle
motivation and provide no incentive for teachers to work harder and better."

Uncle Joel's solution is simple - bring business-like "pay for performance" to schools and measure it by
"our sophisticated new accountability system" (i.e., batteries of standardized tests, including the Regents, the PSAT, and the additional 8 standardized math and reading tests added this year as part of his "no-stakes" testing program.)

Because the pay for performance will be school-based and not individual-based, he says this revolutionary change in teacher pay will not only encourage better individual performance but more collaboration between teachers at schools.

Married to his business metaphor, Klein compares merit pay to stock options:

This school-based incentive structure, in effect, borrows an important concept from business — stock options. When companies give stock options to their employees, they attempt to align their employees' interests with those of the business' shareholders. If a company's stock rises, both the people who work at the company and the people who hold stock in the company experience a direct financial benefit. This gives employees an incentive to behave in ways that will enhance performance and thereby boost the company's stock price.

If only one employee is successful, the stock price is unlikely to rise significantly, just as in our plan, if only one teacher is successful, a school's students are unlikely to perform substantially better.

Only if many are successful and only if the best teachers help their colleagues identify challenges and improve will entire schools succeed and will teachers then become eligible for more pay. This will encourage individual teachers to do their personal best. It also will encourage collaboration and teamwork, as teachers share both responsibilities and rewards.

Klein finishes his piece by noting that the pay for performance program goes into effect in 200 schools this year (there is no mention of the program being contingent upon the passage of the 25/55 pension change.)

All right - let's look at Uncle Joel's business metaphor a little closer.

First, Klein's assertions that
"successful firms pay more for what's worth more" and "they create incentives that motivate employees to work harder and more effectively" are belied constantly in the business press where you read about the kinds of compensation company CEO's like Citigroup's Chuck Prince or Home Depot's former CEO Robert Nardelli pay themselves.

Currently Citigroup is in danger of going belly-up as a result of business decisions Prince made related to sub-prime mortgages and structured investment vehicles (SIVs). Citigroup may have to take a complete loss on as much as $100 billion dollars in SIVs. Conditions are so bad at Citigroup that Secretary of the Treasury Henry Paulson helped sponsor an $80-$100 billion dollar bank bail-out with Bank of America, J.P. Morgan Chase and Wachovia coming to Citigroup's and Prince's rescue. In addition, Citigroup's stock has plunged since Prince took over (losing at least $15 a share.)

Has Prince lost his job at Citigroup? Nope. Will he fail to pay himself a bonus this Christmas? Doubtful. You see, pay for performance is only for the people under Prince at Citigroup.

Certainly Home Depot's former CEO Robert Nardelli never failed to pay himself a bonus (he took home about $200 million in base salary, bonuses, and perks) even though his company's stock was down 13% during his tenure. Nardelli had $3 million of his bonus "guaranteed" annually no matter what happened to his company or his company's stock. He's gone from Home Depot now, but not until he took the company to the cleaners for hundreds of millions of dollars.

Prince and Nardelli are not the only examples of business people at the top receiving gobs of money no matter how they perform. As for the actual workers in business, they're simply cogs in the machine to be laid off at will when companies need to squeeze costs and/or raise their stock prices (in the business model metaphor Klein is Prince/Nardelli and teachers are the workers, of course.)

Klein also asserts in his Sun piece that "when businesses fail to produce results, they close down." But this isn't necessarily true either. As I related above, Citigroup has made huge business mistakes, yet the federal government felt the need to arrange a bail-out for the company.

In addition, last month, the Federal Reserve lowered its benchmark interest rate by 50 basis points in order to help save the financial industry and Wall Street from a self-created global credit crunch that threatened to cause some businesses to go under and thousands of financial workers to lose their jobs. The Fed is expected to lower rates again later this month. Again, if Klein's assertions were true, the Federal Reserve would have taken no action and allowed the free market to work its magic.

Business fetishists like Uncle Joel have a habit of saying publicly that in business only performance matters and compensation is ALWAYS based on performance. But even a perfunctory reading of the recent news in the business newspapers shows these assertions to be simplified at best, completely dishonest at worst.

There are other parts to the school-as-business metaphor I'd like to examine in future posts (like how business these days is mostly short-sighted and stock-driven, privileging quarterly performance over investment and long-term performance.) But for today, let's just note that in business, compensation is often based on cronyism, connections, and position within the company, not merit or performance.

The way the new merit pay program is set up by Klein and the UFT (with a panel of 4 deciding who receives the compensation in a school), I have a strong feeling that pay for performance will also be based on cronyism, connections, and position within the school and not actual merit.
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