Dangers Of An ‘Hours For Dollars’ Mentality
This article goes into details about work, why we work, and focuses on only one motivator of work: money. There are many other reasons we work (fulfillment, fun, endorphins) but that would require a book instead of a blog post.
By not considering these aspects this post is, admittedly, a simplified overview.
Trading dollars for hours is an industrial revolution era method of matching contribution with compensation.
It makes sense for workers on the production line where a set number of screws need screwing each hour, but as soon as you break away from human-as-machine jobs and bring creativity and ingenuity in the formula, the per-hour compensation model falls apart.
None of us are actually paid per hour over the long term. We are all paid on commission. We all earn a percentage of the monetary value we bring to our organizations, customers, or clients.
If you bring more monetary value, you will eventually be paid more.
If you're work is worth $80,000 per year to your company then you can expect to earn $40,000 per year. If you're work is only worth $40,000 then you can expect to earn $20,000.
These paychecks are split up into hourly payments over the year for simplicity, but we are all paid a certain percentage 'commission' of the value we bring to those we work for.
This, however, doesn't mean that people don't believe that they're working on a per-hour basis. In the short term the illusion is very deceiving and appears to be accurate.
We're paid for the value we bring, not the hours we sit in an office chair, but believing that we work per hour (as most people do) leads to some very negative consequences.
Entrepreneurs know that they're not getting paid per hour, and they're largely immune to the illusion, but employees and freelancers are often under the spell. This is a very bad thing for workers, employers, and the economy as a whole.
Here are a few reasons why.
1. Per Hour Work Requires Close Management
How can you make sure someone is working every hour you pay them? Simple, watch them like a hawk. That takes a lot of your time and attention!
As most workers will agree, it's no fun and sometimes degrading to be watched and scrutinized by management.
Unless perfect trust is attained, employees will always want to grab another coffee, chat by the water cooler, or generally waste time in one way or another. And why wouldn't they? Unless they get fired they'll still get the same payment on Friday.
For freelancers who aren't in the same physical space, per hour work tempts lying. If you worked on a project for 8 hours, it's tempting to just write 10 because nobody will know the different and you'll get paid more.
A perfect example of this happened to me when I hired a freelancer on Upwork. The job was a simple copy/paste task that should have taken about 10 hours. The default weekly hour cap was set at 25 hours and I didn't change it. Lo and behold! The work was completed in exactly 25 hours!
Enter, results based pay. Being paid solely for what you create, whether in takes 3 hours or 12, eliminates the need for supervision all together!
It's efficient for all parties involved. It's the reason I can work a freelance gig for someone on the far side of the globe who I've never met and who couldn't monitor me if they wanted to!
When I send them work, it's either what they're looking for or it's not. I'll get paid if it is.
My client can focus on her work and only needs to worry about me when I send in docs for review. As for me, I can actually travel while working and nobody needs to breath down my neck!
2. Extra Effort Isn't Incentivized
When you work on a per-hour basis you don't have strong incentives to increase productivity. If you work really, really, really hard and go twice as fast as your co-workers you'll still get paid the same as everyone else on Friday.
You could ask for a pay raise next week (and maybe you'll get it) but this will be a small percentage increase. Worse, it may be delayed until some upcoming 'review' period.
In the meantime, you'll be working double time for the same pay as the bozo next to you!
If you work on a results basis instead of trading dollars for hours, the situation is different. Working twice as fast means accomplishing everything before lunch! Assuming that you are being compensated fairly in exchange for the value you bring to your company, you now don't need to work for the rest of the day! (That's instantly motivating!)
For those looking to earn more, you could take on another project, finish it on the same day, and receive double pay! That's the kind of instant motivator to get me looking for a better and faster strategy!
Working per hour will eventually pay you what you are worth, but the speedy delivery of reward from results based pay makes it much more persuasive as a motivator.
When I was just starting out with freelance writing I had an agreement with a client to write blog posts for $30 each. Creating a quick methodology to systematize the work I was able to complete 3 article per hour! If I had been working on a per-hour basis I would have no incentive to create a process to write more efficiently.
The drive towards greater efficiency, the entrepreneurial spirit, is hindered by per-hour pay.
3. Inefficiency IS Incentivized
Let's say you're a freelancer and it takes 1 hour of searching to find a job...
If you agree on an hourly rate of $30 per hour and complete the job in 1 hour your 'real' earnings are....
$30/2 hours = $15 per hour for 2 hours
If you drag the work out and decrease your efficiency, making the job take 2 hours, you're suddenly earning...
$60/3 hours = $20 per hour for 3 hours
Being inefficient gets you more hours of work AND a higher wage for those hours.
As already stated, increasing your effort isn't incentivized on a per-hour basis, hindering creativity and entrepreneurial spirit!
The fact that being less efficient actually pays you more stabs that spirit in the heart.
Especially if work isn't plentiful and you need to search for 5 hours to find a job, finishing it in 1 hour would mean a total of 6 hours worked for $30 (only $5 per hour!)
The sad fact is that sometimes freelancers won't be able to find work for long stretches of time. In some cases, expanding work, inflating your hours, and lying to clients can mean the difference between paying the rent and being on the street!
If you agree on a fixed price for a project before work begins, you can ask for more than $30 even if you think the work will only take 1 hour, but you will always be incentivized to finish work quickly and efficiently.
Wasting your time so that the client needs to pay more sucks potential productivity out of the marketplace and out of your day. In the short term per-hour work incentivizes this behavior but the long term results are highly detrimental!
If given the choice to either work per-hour or per-result, I will always choose per-result.
When I work per-hour I feel the negative incentives calling. Especially having been tight on cash for the past few months, these calls have been exceedingly tempting!
I've been working as a freelancer for many clients on a per-results basis. It's insane that if I were working on a per-hour basis finding a faster way to do my work would hurt my income.
Once employees are incentivized to find innovative solutions, instead of being de-incentivized to do so, ideas will begin to flow. This would bring the entrepreneurial spirit into environments and organizations where it is currently absent. This will rapidly increasing innovation, free up more time, and help cut costs in every area of the company.