How Bosses Stay in Charge: A new theory by MIT Sloan Professor Robert Akerlof illustrates how managers establish and maintain authority over their employees

Research shows why companies should pay a fair wage, not hire overqualified workers

Robert AkerlofRobert Akerlof, Lecturer and Postdoctoral Associate, Applied Economics

CAMBRIDGE, Mass., February 10, 2010 — Groucho Marx once said that: “No man goes before his time, unless the boss leaves early.”

It’s an age-old economic conundrum: how can companies ensure their employees are working as hard as they should, even when the big boss isn’t around? The question is the topic of a new theory by Robert Akerlof, a postdoctoral associate in applied economics at MIT Sloan School of Management, about how managers bolster their authority, even in a difficult economy.

“In standard economic theory, there is a sense that the relationship between workers and managers is fixed: that managers tell workers what to do, and workers do it. But, in reality, the relationship is often more tenuous than that,” says Akerlof, whose research combines traditional economic theory with a sociological examination of office politics.

“Sometimes workers respect what a manger tells them to do, and sometimes they don’t. That matters. If you have authority, it’s in your best interest to bolster it.”

For managers who are trying to establish—and more importantly maintain--authority, Akerlof says that the keys are: to give employees simple orders, to reference rules from HQ, to resist hiring overqualified job candidates, and to pay workers a fair wage.

Providing workers with simple, straightforward instruction is critical. “The more complicated an order is, the more likely the worker will be to interpret it to his advantage,” he says.

For instance, let’s say a company mandates that workers come in at 8 o’clock in the morning, but a manager tells workers that on certain days they are allowed to come in later, or come in earlier. “Once you give workers flexibility, they may take advantage, which undermines the boss’ authority.” Referencing rules from the head office also boosts authority. “This is particularly true when managers are trying to make new policies more palatable to workers,” says Akerlof. “Managers can more easily justify them as requirements from HQ.”

Managers looking to strengthen their authority are wise not to hire overqualified workers, he says. “An overqualified person may be difficult to maintain authority over. They can have a bad attitude that’s infectious.”

Akerlof references what’s known as the “20 per cent rule:” bosses ought to be 20 per cent smarter than their workers. “There’s the expectation that the boss knows more and is more experienced. That’s why he’s the boss. When you have an overqualified worker who is supposed to defer to the boss, that makes that worker feel lousy about himself,” he says. “And if this overqualified worker starts to question the boss, then others might feel it’s okay to do so.”

This part of his theory has particular relevance to today’s economic crisis. “There are a lot of people who are very talented who’ve lost their jobs. The jobs openings today may be for work that is below what they were doing before, but managers may not want to hire those people because they are overqualified. They face a special challenge in the job market,” he says.

Finally, managers who are trying to reinforce their authority ought to pay workers a fair wage. If workers believe that they’re doing a good job, but fail to get a pay raise or a bonus, that makes them angry, he says. “It makes you feel that your boss doesn’t understand you, that your boss doesn’t get it. There’s also a sense that if you feel you’re being treated unfairly, you may try to get back at the boss.”

Managers that are this year giving stingy bonuses—or worse, pay cuts—are put in a tricky situation. Akerlof says that it’s important for these managers to frame their actions in such a way that it doesn’t make the behavior seem unfair. “They need to say: ‘Given the constraints of this bad economy, I can either keep wages up and fire more people, or cut wages. None of you deserve a pay cut, but you don’t deserve to be fired either.’ It’s not a given that every employee takes a simplistic attitude of these economic circumstances.”

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