Chief Executive Officers (CEOs) are in charge on the company and are equivalent to the captain of a ship. They provide direction to the company and put efforts to accomplish the vision for which the company is formed. There is a tension between achieving short term outcomes and long term outcomes and sometimes achieving these outcomes can be in apparent conflict. In other words, putting efforts to improve long term outcomes may divert CEO's effort from short term outcomes. However, when the benefits will be reaped by the company the current CEO may not be the CEO of the company and also one may not be able to disentangle the effect of outcome to the effort of this CEO or other factors. This means CEOs have incentives to focus on short term outcomes resulting into decisions with a myopic approach. Needless to say this will be sub-optimal in the long run. In order to overcome this situation, CEOs are incentivized by stock options which motivates them to improve the long term health of the organization.
This kind of behavior is not restricted to executives but we find many professionals having a short term approach to their decision making. Let us take the case of politician. A politician is ideally supposed to take decisions which will be socially optimum in the long run but may be tempted to take decisions which will help the politician to stay in power even if it may be detrimental to the society. Politicians are motivated to "show" that they have taken some action to please the voters. If a politician takes some decision which will have effect in the long run, the same politician may not be in power at that time and hence may not be provided due credit for the actions taken which disincentivizes him/her to take decisions in the interest of the society in the long run.
Now if we look at the case of teachers they are required to help the students improve their marks/grades and also improve their thinking skills, higher order skills and educate them in true sense which will help them in the long run. Focusing on grades/marks (short term goals) is necessary but not sufficient. Not improving higher order skills, thinking skills will be suboptimal in the long run and will not create the necessary human capital. The reason again for the myopic behavior observed is because there is a lot of noise in the relationship between efforts taken by the teacher currently and the outcome that will be observed in the future. However, actions taken can be easily mapped into the improvement of grades/marks and such other performance measures.
What can be a possible solution to improve the situation?
I will focus on education because that to me is the most important area that we need to target sooner than later. There is an apparent constraint in the form of time available for teachers to focus on these two aspects. One thing that can be done is segregate these two responsibilities and have two different persons focusing on short term and long term measures of students' objectives. Since the outcome is difficult to measure in the long run, the educational institutions must be a not-for-profit organizations. Structuring educational institutions as for profit will provide incentives to focus on short term outcomes of marks/grades. Mushrooming of coaching institutes to a large extent is due to the myopic outlook of the society as a whole towards education. This problem is aggravated by the lack of education of parents.
Focusing on outcome rather than efforts is not the first best solution because conversion of efforts into outcome is not straightforward. Incentivizing on efforts although ideal is difficult because it is not easy to observe what the person is doing or how the actions are useful because people who are evaluating performance don't have better information than the persons taking actions. Can we allow professionals to improve long term performance even if it means at the foregoing the benefits in the short term? Our position in the years to come will be determined by the answer to this question.
Ps; I have been an instructor in coaching institutes in the past for Chartered Accountancy (CA), middle school, high school, junior college and degree college students.
This kind of behavior is not restricted to executives but we find many professionals having a short term approach to their decision making. Let us take the case of politician. A politician is ideally supposed to take decisions which will be socially optimum in the long run but may be tempted to take decisions which will help the politician to stay in power even if it may be detrimental to the society. Politicians are motivated to "show" that they have taken some action to please the voters. If a politician takes some decision which will have effect in the long run, the same politician may not be in power at that time and hence may not be provided due credit for the actions taken which disincentivizes him/her to take decisions in the interest of the society in the long run.
Now if we look at the case of teachers they are required to help the students improve their marks/grades and also improve their thinking skills, higher order skills and educate them in true sense which will help them in the long run. Focusing on grades/marks (short term goals) is necessary but not sufficient. Not improving higher order skills, thinking skills will be suboptimal in the long run and will not create the necessary human capital. The reason again for the myopic behavior observed is because there is a lot of noise in the relationship between efforts taken by the teacher currently and the outcome that will be observed in the future. However, actions taken can be easily mapped into the improvement of grades/marks and such other performance measures.
What can be a possible solution to improve the situation?
I will focus on education because that to me is the most important area that we need to target sooner than later. There is an apparent constraint in the form of time available for teachers to focus on these two aspects. One thing that can be done is segregate these two responsibilities and have two different persons focusing on short term and long term measures of students' objectives. Since the outcome is difficult to measure in the long run, the educational institutions must be a not-for-profit organizations. Structuring educational institutions as for profit will provide incentives to focus on short term outcomes of marks/grades. Mushrooming of coaching institutes to a large extent is due to the myopic outlook of the society as a whole towards education. This problem is aggravated by the lack of education of parents.
Focusing on outcome rather than efforts is not the first best solution because conversion of efforts into outcome is not straightforward. Incentivizing on efforts although ideal is difficult because it is not easy to observe what the person is doing or how the actions are useful because people who are evaluating performance don't have better information than the persons taking actions. Can we allow professionals to improve long term performance even if it means at the foregoing the benefits in the short term? Our position in the years to come will be determined by the answer to this question.
Ps; I have been an instructor in coaching institutes in the past for Chartered Accountancy (CA), middle school, high school, junior college and degree college students.
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