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Pundit’s Mailbag — Setting Policy vs. Setting Incentives

We have run many pieces related to Wal-Mart. Recently one of the pieces drew on an anecdotal experience whereby a manager, in complete contravention to company policy, demanded that employees work off the clock. The piece brought this note:

I am a regular reader and very pleased with the in depth analysis of the produce industry that you provide for such a great price.

I was so surprised this year when I called my regular salesman at Ballantine to place my initial order. I had bought from Ballantine for many years and had come to rely upon their quality to make sure none of my east coast customers were ever hurt by poor arrival. It simply never happened. The fact that they only shipped, for me at least, the best quality I could find indicates they had very high standards. I was very sad to hear what happened to them.

In your piece, Pundit’s Mailbag — Poor Management Attitude Leads To Food Safety Failures, you refer to Wal-Mart and their rogue managers that sometimes cause such heartache for the parent company. It reminds me of a truism. Have you ever entered a store and find that the employees are surly or rude or conversely very happy to help you? The attitude of the employees can almost always be traced back to the owner/manager of that establishment.

If there were no shortcuts taken by the top echelon of the store, the employees would never think to emulate those same shortcuts. If there is honor and loyalty on top, it always finds the way to the lowest employee. It is time for Wal-Mart to realize that the leaders set the examples. It doesn’t matter if their employee can speak English fluently; they can watch and learn. How they learn is up to the leaders. If you cannot practice loyalty, you must never expect it from your own employees.

The old ”We have always done it this way” has to be shown the door and a new mindset established. This pertains to all produce. Food safety has to be sought over the lowest price and safe food handling practices have to be respected as the new “bargain”.

— George Worthy
Worthy Enterprises
Gonzales, California

Much of our coverage of the struggle between Jim and Theresa Nolan and their company, The Nolan Network with Ocean Spray, has focused on issues of ethics and morality.

This letter points to the undeniable point that attitudes are set from the top and that leaders that behave in an ethical way set a tone for the employees and the company.

Yet this admonition to be ethical and not take short cuts, though good advice, strikes us as incomplete.

In the Wal-Mart situation, it still doesn’t answer the question as to what motivated the store managers to behave in violation of not only ethical behavior and company policy but in violation of the law. Certainly we have no reason to believe that the top executives at Wal-Mart in some way modeled that behavior.

As we discussed in the piece, the more logical assessment is that although the policy is clear, the incentives are divergent from the policy.

We discussed this issue in this piece in which we discussed how Domino’s Pizza had a clear policy that pizza delivery drivers should not speed, but also had an incentive structure and culture built around getting the pizza there in 30 minutes. In the end, the incentives to get there in 30 minutes won out over the admonitions not to speed, and someone died.

In business we find that employees listen carefully to ascertain what really matters to their bosses. In the Domino’s case, they heard that whatever the policy, there was no reward for not speeding and lots of reward for getting the pizza there on time.

When it comes to food safety, the problem is that outbreaks are so sporadic. All the produce out there is very safe by any rational standard, so the decision to adopt a higher standard than that the product must be legal is a somewhat arbitrary judgment call.

If we have a buyer and tell him to make food safety our top priority, what are we actually telling him? If a vendor walks in and says, “I have a 100-yard buffer around my farm,” and the next vendor says, “I have a 200-yard buffer around my farm” — all other things being equal, is the buyer obligated to buy from the vendor with the largest buffer?

Isn’t there any requirement to prove efficacy in enhancing safety?

And what about price? Suppose we acknowledge that a 200-foot-buffer vendor is safer. That whereas a 100-foot buffer will produce one illness every 100-million packages, the 200-foot buffer will produce one illness every 200-million packages. Does that simply disqualify the 100-foot buffer vendor? Does it mean we prefer the 200-foot-buffer vendor unless he is more expensive? How much extra should we pay for this additional margin of safety?

We were out in Los Angeles recently and had an opportunity to visit a lot of the ethnic independent markets, often selling produce for a fraction of the cost of the big chains. Even if we could demonstrate that the produce being sold by these independents was less safe than that sold by the major chains, it is not obvious to us that consumers, even if we sat them down individually and fully explained the matter, would not elect to take some additional risk in order to get their produce at half price or less.

Outbreaks have such catastrophic impacts on the industry that it is hard to imagine any price not worth paying to avoid the business disruptions and reputational harm caused by these outbreaks. Yet, at some point, someone will have to ask whether what consumers want is to pay higher and higher prices to make infinitesimal improvements in food safety. We somehow doubt it.

Many thanks to George Worthy and Worthy Enterprises for weighing in on this important issue.

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