Skill or luck – on outcomes, rewards and fairness 2/2

Who gets the prize?

In my previous post I showed how skill and luck play a role in most activities and why it is important to distinguish between the two and their impact on outcomes. I also argued that evaluating outcomes and awarding people only on that basis is not always right. Yet, we often evaluate outcomes, since they are often easy to grasp and measure. However, as already mentioned, if an individual’s or organization’s impact on a specific outcome is negligible in comparison to the impact that luck has, evaluation solely based on outcome is not fair. The individual should rather be evaluated based on his adhering to the agreed process used to reach the outcome, as previously discussed. Also, among top performers luck, paradoxically, plays a relatively larger role in deciding outcomes. Therefore, we should in evaluating performance and providing merit pay attention to the three following points:

  1. Level of personal influence
  2. The process used to reach the outcome
  3. Level of competition

If we have no or very little personal influence on our success or failure, we should not be overly rewarded for good outcomes, nor punished or left completely unrewarded when the outcomes are less favorable. As mentioned before, luck dominated events might be shoved towards the skill dominated end of the spectrum, but this requires honing our skills and executing the event so as to maximize our impact. In this case, even if luck still dominates the outcome, we will have done our best to tilt the scales to our benefit; had we not followed the optimal process, the outcome would have been even worse. This implies that the correct process of working towards a goal and becoming proficient in that process should be merited, although measuring this might be more complicated than simply observing the outcome.

Finally, we should always observe the level of competition. If a person finishes last in the hundred meter dash finals in the Olympics, he is not a failure in sports and hardly beaten by the casual sprinter. Since luck has a larger role in defining the exact outcome at the top level, especially here we should give rewards for effort and process, not for the outcome. Of course outcomes do matter and they should be given merit. After all, if an outcome gets no merit, why would anyone go through the process required to reach that outcome? We just have to pay attention to the division of merit: as the pressure of reaching good outcomes and the desire for the prize get too high, the correct process may not be adhered to anymore, making the achieved outcomes also questionable.

Bonus or layoff, either way deserved?

As a practical example on rewarding individuals in a group of top performers I raise the rank and yank used by some companies to encourage their employees for better performance. The purposefulness of this policy is easily evaluated with the skill-luck model.

With rank and yank I refer to the practice where employees are annually ranked into multiple categories with fixed percentage quotas, and their future career development and remuneration is category dependent. For example, 10% are evaluated as top performers and they are given above average bonuses and promoted to more demanding position, 80% are average and receive the average bonus while keeping their current job and 10% are below average and have to be fired. Here we have at least three problems: role of skill and luck in an outcome, paradox of skill and the correctness of the evaluation. I will disregard the correctness of evaluation from further discussion, since it is a separate topic, but it is obvious that if the results of an evaluation are not correct or are inconsistent with other evaluations, any decision based on that becomes questionable.

As mentioned before, if the outcome of an individual’s work is largely dominated by luck, firing that individual due to poor outcomes hardly seems justified, assuming that the individual has tried to maximize the potential outcome to the best of his abilities. Also, if the individual belongs to a group of talented individuals, luck is bound to have a larger effect on the exact individual performance inside the group, again making the following gratification and firing of employees questionable.

Companies are reviewing and changing their evaluation and reward systems to help their employees learn and improve their skills constantly. For example, General Electric is using an mobile application that enables the supervisor to encourage and give positive feedback for  positive actions while asking to consider changing less desired ones. Here we see how placing the work process under focus might be the way how personal performance is evaluated and remunerated in the future.

Ain’t I lucky being so skillful

As a final thought a few words on the division of well-being on the global level since, here again, it is a question of skill and luck.

Nobody can choose the family and society to which they are born, nor can a person choose the time to which he is born. Yet, based on family ties and structure of the society, the easily accessible life and career paths are limited. A society offering good healthcare, public education for all and a stable government is much more likely to bring about successful individuals than a society plagued with high child mortality, low level of education and turbulent politics. Against this background, it makes me think what is the obligation of the richer countries to assist the poorer ones to reach higher standards of living? What is our obligation as individuals living in the richer countries to help those living in the poorer ones?

If my success is mostly dictated by luck, by having been born in the right country at a good time to the right parents, how much of the ensuing well-being belongs to me and how much should I share with others? I might claim that my success in studies and at work are a result of my own efforts, but they are also based on both nature and nurture, on my education (broadly understood) and genes, both of which are outside factors, or luck. This notion contradicts the definition of skill in the beginning of part one of this post, where I defined DNA and level of proficiency attained through education and practice to be individual attributes. As it seems, drawing a line between personal attributes and external factors is not easy. This makes the final distinction between skill and luck less clear, giving all the more reason for us to think about it and try to reach a fair solution.

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