Year: 2006

Recent Trends in the Level and Geography of Ohio Hog Production

Ohio has experienced a recovery in hog numbers over the past five years. This has stimulated discussion of how Ohio will fare in upcoming decades with regard to its hog industry and how the state’s livestock landscape will continue to evolve. In this issue I’d like to take a look at this recent increase in hog inventories, document where in Ohio the growth has been taking place over the past few years, analyze how Ohio’s production has shifted over the past few decades, and analyze if recent trends in geographical concentration are sustainable over the next decade.  Full text availalbe here:

http://ohioagmanager.osu.edu/resources/Hog_patterns_2006.pdf

Worker's Compensation 1K Program Expands to 5K

Worker’s Compensation Insurance Coverage is designed to protect employees. It is not optional, and represents a significant expense for Ohio’s farm businesses. Premium costs can reach 25% of gross payroll without careful management. Each farm business must make employee safety a priority. Proper training and maintenance are critical investments towards achieving a safe workplace.

Other tools to minimize Worker’s Compensation premiums are available to all farm businesses and have been discussed in previous issues of the OAM. Recent passage of Senate Bill 7 increased the payment limit in the $1,000 Medical-Only or 1K Program. Claims with a date of injury occurring on or after June 30, 2006, will now fall under the $5,000 Medical-Only or 5K Program.

An employer must be enrolled in the program before a claim occurs. Once enrolled, if an accident occurs, an employer can pay all medical expenses up to $5,000 if no more than 7 days of work are lost. An employer has the option of telling the Bureau of Worker’s Comp that it does not wish to pay the medical bills for a particular claim and allow it to follow the regular claim process through their designated MCO (managed care organization).

If the employer chooses to pay the medical bills for a qualifying accident, the accident will not be part of the employer’s WC claim history. This claim history is used to determine eligibility for and discount level of group rating program participation. Claims involving more than $5,000 of medical expenses or 7 days of lost work time must go through the regular Worker’s Compensation claim process.

Follow this link to find more detailed information on this program:
http://www.ohiobwc.com/basics/guidedtour/generalinfo/empgeneralinfo26.asp

Farm Management, Marketing and Economics Events at the 2006 Farm Science Review

Even though new equipment and machinery dominate the Farm Science Review each year, economics and the bottom line should always play the major role in your decision making.


The Department of Agricultural, Environmental and Development Economics together with Ohio State University Extension will offer several new activities, exhibits, presentations and opportunities to interact with Agricultural Economists, Farm Management Specialists and Extension Educators at this year’s Farm Science Review, September 19th through the 21st at the Molly Caren Agricultural Center.

Input Cost Increases Focus of Display
Knowing your input costs and how to manage them are a big part of farm profitability. Examining fuel and fertilizer costs and their impact on the bottom line is the focus of an exhibit in the Francine Firebaugh Building at this year’s Review. OSU Extension Enterprise Budgets will be highlighted and 5 year cost increases will be illustrated along with detailed breakdowns for fuel, fertilizer and land costs. Newly updated “Ohio Farm Custom Rates – 2006” will be on display along with a comparison of the 2002 and 2006 rates. “Ohio Cropland Values and Cash Rental Rates 2005-06” will also be a part of the exhibit and be available as a handout. “Building for the Successful Transition of Your Agricultural Business” will be another focus of this exhibit which centers on economic issues affecting the farm business. This part of the exhibit contains information on upcoming new educational materials and workshops to be held in January and February of 2007 on Farm Transition Planning!

The exhibit will also feature the Ohio Ag Manager Newsletter that is published to provide Ohio’s farmers and agribusiness managers the latest and best management and marketing information. The Ohio Ag Manager is a free monthly electronic newsletter, published by OSU Extension, available to everyone via listserv or web. The goal of the Ohio Ag Manager Team is to provide agricultural businesses with timely management information dedicated to improving efficiency and profitability. Focal issue areas discussed in the monthly electronic newsletter include financial, labor, legal and risk management as well as marketing and human resource development. Current and past newsletters along with subscription information can be found at the Ohio Ag Manager website at:

http://ohioagmanager.osu.edu/

Farm Business Office in the Firebaugh Building
The Farm Business Office at the Farm Science Review is located in the Francine Firebaugh Building and will give Review goers the opportunity to interact one-on-one with Ohio State University Extension Farm Management Specialists, OSU Agricultural Economists, and OSU Extension Educators.
Review goers can seek advice on various farm business and management topics including farm transition planning, estate planning, retirement planning, farm record keeping and analysis, tax management, human resources management, budgeting, farmland rental and purchase issues, risk management issues and more.

Data Shed at Farm Science Review
How much more will you pay to buy farm inputs locally? Why are you at the Review? How much does your hired help make? Do you care where your food comes from? You might get asked these kinds of questions at the 2006 Farm Science Review. Researchers from the Department of Agricultural, Environmental, and Development Economics will be popping up in various locations on the grounds to ask you a couple quick questions. Your answers will help plan research and extension projects and the next Farm Science Review. You might even be invited into the “Data Shed” at the Ohio Farmer Building, corner of Friday and Kottman, to do a quick experiment to find out what your decisions are worth to the ag economy.

Energy & Bio-Fuels: Economic & Policy Issues Defining Agriculture
10-11 a.m. Tuesday, September 19, 2006
Tobin Building, Molly Caren Center
Hosted by OSU Agricultural, Environmental & Development Economics

This annual Farm Science Review discussion gives policymakers, farmers, and industry leaders tools for understanding and analyzing the future of agriculture in Ohio. This year’s discussion is about Energy and Biofuels – what needs there are and the true economics behind ongoing policy discussion. Brent Sohngen will moderate this year’s panel of economists from Ohio State and Purdue University.

“Question the Authorities”
Live interviews of Ohio State’s authorities on current economic, business and policy issues. OSU’s Department of Agricultural, Environmental, and Development Economics sponsors this series of short interviews on the stage beside the Leaper Antique Building in Alumni Park on Friday Avenue. Stan Ernst leads the discussion, then opens things up for audience questions – your chance to question the authorities.

Each day of the Review, you’ll hear about timely topics – everything from current market behavior, marketing and economic performance, to welfare reform, trade policy and the impact of new technology on farms. Join the host in trying to stump the authorities with your toughest questions. This projected schedule is subject to change. Check the signboard along Friday Ave for daily lineups.

Tuesday, September 19
8:00 Early Bird Outlook: Grain Markets & Energy – Matt Roberts & Stan Ernst
11:15 Farm Bill Update – Carl Zulauf (OSU AED Economics)
11:30 Methamphetamines: Fighting a Rural Scourge – Karen Zotz (Purdue Extension)
11:45 How to Get Paid for Water Quality – Brent Sohngen (OSU AED Economics)
12:00 QUESTION THE AUTHORITIES: THE GAME (audience competes for prizes)
12:15 Increases in Direct Market Opportunities – Julie Fox (OSU South Centers)
12:30 Cropland Values & Rents – Barry Ward (OSU AED Economics)
12:45 The Cost of Safety – Dee Jepsen (OSU Ag Health & Safety Program)
1:00 Transferring the Farm to the Next Generation – Don Breece (OSU Extension)
1:15 Renewable Energy Ideas – Fred Hitzhusen (OSU AED Economics)
1:40 Grain Market Outlook – Matt Roberts (OSU AED Economics)
2:00 Wanna Be A Buckeye? (student opportunities) – Kelly Koren (OSU)
2:15 Healthy People, Healthy Communities – Karen Zotz (Purdue Extension)
2:40 Energy Outlook – Matt Roberts
3:00 Fertilizer, Fuel & Custom Rates – Barry Ward (OSU AED Economics)
3:15 Kid Labor/Cheap Labor – Dee Jepsen (OSU Ag Health & Safety Program)


Wednesday, September 20
8:00 Early Bird Outlook: Grain Markets & Energy – Matt Roberts & Stan Ernst
9:45 Wanna Be A Buckeye? (student opportunities) – Kelly Koren (OSU)
10:00 “Zoning” is not a 4-letter word – Peggy Kirk Hall (OSU AED Economics)
10:15 Livestock Outlook – Brian Roe (OSU AED Economics)
10:40 Who Will Work for Me? – Dave Boulay (OSU South Centers)
11:00 What Ohioans Think of Agriculture – Jeff Sharp (OSU Rural Sociology)
11:15 Livestock Outlook – Brian Roe (OSU AED Economics)
11:30 Cropland Values & Rents – Barry Ward (OSU AED Economics)
11:45 Energy Outlook – Matt Roberts (OSU AED Economics)
12:00 QUESTION THE AUTHORITIES: THE GAME (audience competes for prizes)
12:15 Grain Market Outlook – Matt Roberts (OSU AED Economics)
12:40 Finding & Motivating Good Workers – Dave Boulay (OSU South Centers)
1:00 Is Rural Retail Dead? – Leslie Stoel (OSU Consumer Science)
1:20 Transferring the Farm to the Next Generation – Don Breece (OSU Extension)
1:40 Fertilizer, Fuels & Custom Rates – Barry Ward (OSU AED Economics)
2:00 The Cost of Safety – Dee Jepsen (OSU Ag Health & Safety Program)
2:15 Why is Free Trade So Misunderstood? – Stan Thompson (OSU AED Economics)
2:40 Neighbor Issues — fences & drainage – Peggy Kirk Hall (OSU AED Economics)
3:00 Aquaculture Opportunities – Laura Tiu (OSU South Centers)
3:15 Green Industry Economics – Jim Chatfield (OSU Extension/Horticulture)


Thursday, September 21
9:45 Wanna Be A Buckeye? (student opportunities) – Kelly Koren (OSU)
10:00 Budgeting for New Enterprises – Barry Ward (OSU AED Economics)
10:15 Transferring the Farm to the Next Generation – Don Breece (OSU Extension)
10:40 Farmland Protection Priorities – Jill Clark (AED Economics)
11:00 Grain Market Outlook – Matt Roberts (OSU AED Economics)
11:15 Green Industry Economics – Jim Chatfield (OSU Extension/Horticulture)
11:30 Fertilizer & Fuels Outlook – Barry Ward (OSU AED Economics)
11:45 Energy Outlook – Matt Roberts (OSU AED Economics)
12:00 QUESTION THE AUTHORITIES: THE GAME (audience competes for prizes)
12:15 Grain Market Outlook – Matt Roberts (OSU AED Economics)
12:45 Cropland Values & Rents – Barry Ward (OSU AED Economics)
1:00 The Cost of Safety – Dee Jepsen (OSU Ag Health & Safety Program)
1:15 Transferring the Farm to the Next Generation – Don Breece (OSU Extension)
1:40 Farm Custom Rates – Barry Ward (OSU AED Economics)
2:00 Kid Labor/Cheap Labor – Dee Jepsen (OSU Ag Health & Safety Program)
2:15 TBA

Designing Effective Pay-For Performance Systems for Employees & Suppliers-Part 4

This is the fourth part of the series on designing effective pay-for-performance plans. This month, we will address the question of whether it is fair or economically reasonable to condition an employee’s pay on his performance even if performance is not determined solely by actions that he can control. In other words, what happens if performance outcomes are not purely a function of an employee’s effort, but are also affected by factors beyond the control of the employee? Would it still be fair to make the employee’s pay depend on her performance? And if so, how should the manager design such an incentive plan without alienating employees or causing them to quit?  Read the full article at the link below:

http://ohioagmanager.osu.edu/resources/wu_part4.pdf

Using Computers to Manage the Modern Farm Business – Online QuickBooks and Quicken Manuals

Computerizing farm financial records can help producers gain efficiencies and enhance their financial analysis. With a computerized farm record keeping system, the record keeper can use software to store information, summarize data, and generate reports.

Producers can now access online manuals instructing them on how to setup QuickBooks or Quicken for their farm business. These online manuals walk the user through the setup and operation of each of these popular financial software packages for the farm and small business.

“Using Computer to Manage the Modern Business – QuickBooks Pro 2005” is an online publication developed by The University of Tennessee Extension that provides detailed information on the setup and operation of QuickBooks. To locate this publication go to:

http://economics.ag.utk.edu/pubs/business/bw2005.pdf

“Computerized Farm Record Keeping with Quicken 2006” is an online manual developed for producers interested in a low cost, easy-to-use computerized financial record keeping package. The objective of the authors is for Quicken users to begin keeping farm records on their home computer by following the step by step procedures outlined in each chapter of this manual. To access this publication go to:

http://ohioline.osu.edu/b925/

Best Management Safety Practices for the Farm

The USDA has eleased an agricultural security publication. This document includes checklists for agricultural operations with crops, chemicals, livestock, poultry, and dairy. It emphasizes the importance of security awareness, emergency planning, and general security issues.

These issues could also be called Best Management Safety Practices for the farm, in that they address all the old safety awareness tips like:
– keep chemicals in original containers and in a locked facility
– have an emergency operation plan
– post emergency phone numbers for fire, police, veterinarians, etc.
– maintain an inventory of fuel (diesel, gas, propane, acetylene, kerosene)
– properly train employees how to operate equipment/react in an emergency

To obtain a copy of the Pre-Harvest Safety Security Guide, producers can download them from the USDA Homeland Security Office webpage at: http://www.usda.gov/homelandsecurity/

Fertilizer Containment Deadline Nearing

Prior to 2002, farmers who stored liquid fertilizer were not subject to commercial facility regulations.  With more producers installing their own bulk storage facilities, there is an increased need for environmentally responsible and economically reasonable containment requirements. All on-farm fertilizer storage tanks with 5000 gallon capacity or more in place before January 2002 must have secondary containment dikes by January 1, 2007.  Farmers who build new fertilizer storage facilities over 5,000 gallons, or make additions to their current storage tanks that increase total capacity greater than 5,000 gallons,  and store bulk fertilizers for more than 30 days, must adhere to the Ohio Department of Agricultures storage regulations immediately.


The ODA regulations for the above facilities require the dikes and surface area to be constructed of materials compatible with the liquids they are to contain. The dike must be  capable of withstanding a liquid discharge; and restrict vertical and horizontal liquid movement to no more than thirty-five hundredths of an inch per day.  Most secondary containment facilities in place have been built with either concrete or of treated wood or steel walls with an non permeable liner.  The containment dike must hold 10% more volume than the largest tank located within the containment area. Any storage tank over 15 feet tall should be placed at least 4 feet from the inside base of the dike, to prevent leakage outside the area.  Special attention must be given to the strength of the containment areas floor, due to the extensive weight of large vertical tanks filled with liquid fertilize.

Owners of bulk fertilizer storage facilities must perform regular inspections, maintenance, and keep records.  These records should be kept on-site for a period of five years, and be available for inspection by the Department of Agriculture, upon their request. The three types of records required include a record of all repairs and maintenance work performed on each tank or the containment area, weekly inventory records of liquid levels for each permanent tank in the facility, and a record of any accidental discharge outside of the dike.  The latter includes the date and time of the discharge, type of bulk fertilizer, the amount of discharge, the action taken to recover the discharge, and the method of disposal of any recovered discharge. All spills outside of the containment area should be reported to both the National Response Center (1-800-424-8802) and the Ohio Environmental Protection agency of emergency management (1-800-282-9378).

Every owner of a bulk fertilizer tank should have a written response plan to cover accidental discharges. This plan should be kept near the storage facility and be available for inspection by the Department of Agriculture. The plan should include the identity and telephone number of the persons or agencies who should be contacted in the event of an emergency, and a map of the physical layout of the storage facility, including the identification of each type fertilizer stored at the facility.
For more information see OSU Extension fact sheet, AEX-594-04, New Requirements for On-Farm, Storage of Bulk Fertilizers .  It is available  at the OSU Extension office or online or at: http://ohioline.osu.edu/aexfact/0594_2.html .

Farm Management, Marketing and Economic Events at the 2006 Farm Science Review

Even though new equipment and machinery dominate the Farm Science Review each year, economics and the bottom line always play the major role in your decision making.  The Department of Agricultural, Environmental and Development Economics together with Ohio State University Extension will offer several new activities, exhibits, presentations and opportunities to interact with Agricultural Economists, Farm Management Specialists and Extension Educators at this year’s Farm Science Review, September 19th through the 21st at the Molly Caren Agricultural Center.

Input Cost Increases Focus of Display

Knowing your input costs and how to manage them are a big part of farm profitability. Examining fuel and fertilizer costs and their impact on the bottom line is the focus of an exhibit in the Francine Firebaugh Building at this year’s Review. OSU Extension Enterprise Budgets will be highlighted and 5 year cost increases will be illustrated along with detailed breakdowns for fuel, fertilizer and land costs. Newly updated “Ohio Farm Custom Rates – 2006” will also be on display along with a comparison of the 2002 and 2006 rates. “Ohio Cropland Values and Cash Rental Rates 2005-06” will also be a part of the exhibit and be available as a handout.

The exhibit will also feature the Ohio Ag Manager Newsletter that is published to provide Ohio ‘s famers and agribusiness managers the latest and best management and marketing information. The Ohio Ag Manager is a free monthly electronic newsletter available to everyone via listserv or web. The goal of the Ohio Ag Manager Team is to provide agricultural businesses with timely management information dedicated to improving efficiency and profitability. Focal issue areas discussed in the monthly electronic newsletter include financial, labor, legal and risk management as well as marketing and human resource development. Current and past newsletters along with subscription information can be found at the Ohio Ag Manager website at:

http://ohioagmanager.osu.edu/

Farm Business Office in the Firebaugh Building

The Farm Business Office at the Farm Science Review is located in the Francine Firebaugh Building and will give Review goers the opportunity to interact one-on-one with Ohio State University Farm Management Specialists, Agricultural Economists, and Extension Educators.

Review goers can seek advice on various farm business and management topics including estate planning, farm transferal planning, retirement planning, farm record keeping and analysis, tax management, risk management, human resources management, budgeting, farmland rental and/or purchase issues and more.

Data Shed at Farm Science Review

How much more will you pay to buy farm inputs locally? Why are you at the Review? How much does your hired help make? Do you care where your food comes from? You might get asked these kinds of questions at the 2006 Farm Science Review. Researchers from the Department of Agricultural, Environmental, and Development Economics will be popping up in various locations on the grounds to ask you a couple quick questions. Your answers will help plan research and extension projects and the next Farm Science Review. You might even be invited into the “Data Shed” at the Ohio Farmer Building , corner of Friday and Kottman, to do a quick experiment to find out what your decisions are worth to the ag economy.

Energy & Bio-Fuels: Economic & Policy Issues Defining Agriculture

10-11 a.m. Tuesday, September 19, 2006

Tobin Building , Molly Caren Center

Hosted by OSU Agricultural, Environmental & Development Economics

This annual Farm Science Review discussion gives policymakers, farmers, and industry leaders tools for understanding and analyzing the future of agriculture in Ohio . This year’s discussion is about Energy and Biofuels – what needs there are and the true economics behind ongoing policy discussion. Brent Sohngen will moderate this year’s panel of economists from Ohio State and Purdue University .

Question the Authorities

Live interviews of Ohio State ‘s authorities on current economic, business and policy issues. OSU’s Department of Agricultural, Environmental, and Development Economics sponsors this series of short interviews on the stage beside the Leaper Antique Building in Alumni Park on Friday Avenue. Stan Ernst leads the discussion, then opens things up for audience questions – your chance to question the authorities.

Each day of the Review, you’ll hear about timely topics – everything from current market behavior, marketing and economic performance, to welfare reform, trade policy and the impact of new technology on farms. Join the host in trying to stump the authorities with your toughest questions. This projected schedule is subject to change. Check the signboard along Friday Ave for daily lineups.

Tuesday, September 19

8:00 Early Bird Outlook: Grain Markets & Energy – Matt Roberts & Stan Ernst

11:15 Farm Bill Update – Carl Zulauf (OSU AED Economics)

11:30 Methamphetamines: Fighting a Rural Scourge – Karen Zotz (Purdue Extension)

11:45 How to Get Paid for Water Quality – Brent Sohngen (OSU AED Economics)

12:00 QUESTION THE AUTHORITIES: THE GAME (audience competes for prizes)

12:15 Increases in Direct Market Opportunities – Julie Fox (OSU South Centers)

12:30 Cropland Values & Rents – Barry Ward (OSU AED Economics)

12:45 The Cost of Safety – Dee Jepsen (OSU Ag Health & Safety Program)

1:00 Transferring the Farm to the Next Generation – Don Breece (OSU Extension)

1:15 Renewable Energy Ideas – Fred Hitzhusen (OSU AED Economics)

1:40 Grain Market Outlook – Matt Roberts (OSU AED Economics)

2:00 Wanna Be A Buckeye? (student opportunities) – Kelly Koren (OSU)

2:15 Healthy People, Healthy Communities – Karen Zotz (Purdue Extension)

2:40 Energy Outlook – Matt Roberts

3:00 Fertilizer, Fuel & Custom Rates – Barry Ward (OSU AED Economics)

3:15 Kid Labor/Cheap Labor – Dee Jepsen (OSU Ag Health & Safety Program)

Wednesday, September 20

8:00 Early Bird Outlook: Grain Markets & Energy – Matt Roberts & Stan Ernst 9:45 Wanna Be A Buckeye? (student opportunities) – Kelly Koren (OSU)

10:00 “Zoning” is not a 4-letter word – Peggy Kirk Hall (OSU AED Economics)

10:15 Livestock Outlook – Brian Roe (OSU AED Economics)

10:40 Who Will Work for Me? – Dave Boulay (OSU South Centers)

11:00 What Ohioans Think of Agriculture – Jeff Sharp (OSU Rural Sociology)

11:15 Livestock Outlook – Brian Roe (OSU AED Economics)

11:30 Cropland Values & Rents – Barry Ward (OSU AED Economics)

11:45 Energy Outlook – Matt Roberts (OSU AED Economics)

12:00 QUESTION THE AUTHORITIES: THE GAME (audience competes for prizes)

12:15 Grain Market Outlook – Matt Roberts (OSU AED Economics)

12:40 Finding & Motivating Good Workers – Dave Boulay (OSU South Centers)1:00 Is Rural Retail Dead? – Leslie Stoel (OSU Consumer Science)

1:20 Transferring the Farm to the Next Generation – Don Breece (OSU Extension)

1:40 Fertilizer, Fuels & Custom Rates – Barry Ward (OSU AED Economics)

2:00 The Cost of Safety – Dee Jepsen (OSU Ag Health & Safety Program)

2:15 Why is Free Trade So Misunderstood? – Stan Thompson (OSU AED Economics)

2:40 Neighbor Issues — Fences & drainage – Peggy Kirk Hall (OSU AED Economics)

3:00 Aquaculture Opportunities – Laura Tiu (OSU South Centers)

3:15 Green Industry Economics – Jim Chatfield (OSU Extension/Horticulture)

Thursday, September 21

9:45 Wanna Be A Buckeye? (student opportunities) – Kelly Koren (OSU)

10:00 Budgeting for New Enterprises – Barry Ward (OSU AED Economics)

10:15 Transferring the Farm to the Next Generation – Don Breece (OSU Extension)

10:40 Farmland Protection Priorities – Jill Clark (AED Economics)

11:00 Grain Market Outlook – Matt Roberts (OSU AED Economics)

11:15 Green Industry Economics – Jim Chatfield (OSU Extension/Horticulture)

11:30 Fertilizer & Fuels Outlook – Barry Ward (OSU AED Economics)

11:45 Energy Outlook – Matt Roberts (OSU AED Economics)

12:00 QUESTION THE AUTHORITIES: THE GAME (audience competes for prizes)

12:15 Grain Market Outlook – Matt Roberts (OSU AED Economics)

12:45 Cropland Values & Rents – Barry Ward (OSU AED Economics)

1:00 The Cost of Safety – Dee Jepsen (OSU Ag Health & Safety Program)

1:15 Transferring the Farm to the Next Generation – Don Breece (OSU Extension)

1:40 Farm Custom Rates – Barry Ward (OSU AED Economics)

2:00 Kid Labor/Cheap Labor – Dee Jepsen (OSU Ag Health & Safety Program)

2:15 TBA

What's Up with Wheat?

I’ve had many questions recently about the wheat market. Most of the questions have been about convergence, or lack thereof, in the July CBOT wheat futures market. Before we answer that question, let’s review some futures basics. A futures market is a market in the price of a good for
delivery at some time and location in the future. Because prices vary over time and space, there is typically a difference between the price of the good ‘here and now’ and ‘there and then.’ We call this difference ‘basis.’   One of the tenets of futures markets is that the cash and futures prices
should converge, i.e. the basis should go to zero, at the delivery point as the futures contract approaches expiration.

Read the rest at
http://aede.osu.edu/people/roberts.628/extension/newsletter/n06.pdf

Designing Effective Pay-For Performance Systems for Employees & Suppliers-Part 3

In last month’s article, I assumed that the incentive designer can easily measure performance and design incentives around these performance measures. For example, it is quite straightforward to determine how many windshields an installer at Safelite installs per day. It is also straightforward to trace a poor installation back to the original installer. However, in other cases, performance measurement is not so easy. For example, how does one objectively measure someone’s creativity, degree of cooperation, ability to adapt and be flexible, etc.? In addition, even if something is easy to measure, is it verifiable by a third party? If so, then a pay-for-performance plan would be legally enforceable, which can also impact the effectiveness of the plan. In general, I want to discuss three broad classes of performance measures:

1. Those that are objectively measured by a third party.

2. Those that are objectively measured but not disclosed to third parties (reduced transparency).

3. Those that are subjectively measured.

By “objectively” measured, I mean that it is possible to measure performance with little ambiguity. For instance, one can easily count number of windshield’s, measure the ton of tomatoes in a shipment, count the number of dead chickens in a flock, etc. However, this does not mean that one cannot manipulate outcomes that can be objectively measured. By “subjective” measurement, I mean that it is almost impossible to measure performance without ambiguity and subjectivity. For example, one’s degree of “cooperation” with peers is difficult to measure using an objective scale. Instead, one must rely on opinions of co-workers and supervisors.

Here are some specific examples:

  1. In the California processing tomato industry, processors write incentive contracts with growers. Some growers are paid bonuses based on performance measures such as sugar content. A third party, known as the Processing Tomato Advisory Board measures these outcomes.
  2. Feed conversion ratio and mortality rates in hog or broiler contracts are generally measured by the processor. Hence, these can be objectively measured but they are not necessarily verified by a third party.
  3. Subjective measures – cooperativeness, flexibility, motivation, good attitude, able to meet deadlines (rise to the occasion), and leadership.

Why is the type of performance measure important? Because it can dramatically impact the effectiveness and credibility of the incentive plan. Transparent, objectively measured performance can result in pay plans and agreements that are legally enforceable and have more credibility. Employees can be fairly certain that they will earn what they are promised when objective, verifiable criteria are used. Incentive plans built around these criteria tend to do “what they are supposed to do” and provide strong incentives to perform, without much room for manipulation and controversy. It is also easy to construct piece rates around these types of performance measures. In general, it is much easier to measure performance related to mechanistic or routine tasks such as picking apples, and data entry, and much more difficult to measure performance for tasks that require creativity, subtlety, and judgment.

Outcomes that can be objectively measured but are not undertaken by third parties can also be used for effective pay-for-performance plans. However, there is greater scope for controversy here and both parties have to develop a reputation for honesty and integrity to avoid conflicts. For example, there is great controversy in chicken broiler contracting because chicken farmers sometimes allege that integrators weigh birds and determine feed conversion ratios without making the performance data available to growers. These types of controversies undermine the incentive effects of the pay-for-performance plan because growers are not sure that they will be justly rewarded even when they deliver good birds or improve feed conversion. In fact, some states are considering creating legislation that mandates that integrators release performance data to any grower who wants them and provides growers with the right to be present at the time quality performance is measured. In contrast, these types of controversies rarely arise in the California processing tomato industry because a third party measures and verifies performance.

Finally, subjective performance measures tend to be the least reliable. However, they are subject to many perception errors (e.g. downgrading a person’s entire performance portfolio on the basis of one error or vice versa, overrating everybody, etc.), and political influence. If there is perceived bias in subjective performance evaluations, employees might rebel and consider the system too unfair or political so they may “game” the system. This undermines credibility and may even create a culture of mistrust that can be counterproductive. In addition, Baker, Jensen and Murphy report data showing that most people tend to overrate their own performance which can make supervisors reluctant to provide poor performance ratings to avoid conflict. Thus, these performance measures may contain less useful information about performance because there could be “performance inflation.”

While subjective performance measures have some pitfalls, they are useful for capturing outcomes that are difficult to measure objectively. Basing performance only on objective measures might be short sighted and incomplete. For those of you who follow football, think of Peyton Manning versus Joe Montana. Peyton Manning has better objective performance numbers (e.g. QB rating, TD passes thrown per season), but Joe Montana is known for his “subjective” attributes such as leadership and performance under pressure. It would not be difficult to imagine that many people would rather have Joe Montana rather than Peyton Manning at the QB position for an important game.

For subjective performance measures to be used effectively, there has to be a reasonable degree of trust between the boss and the employee, and there must not be so much performance inflation that the measures have little useful information content to distinguish “good” from “bad” performance. There are, however, variously methods developed by human resources professionals to improve the quality of subjective evaluations, but an adequate coverage of these methods would be beyond the scope of this article. For people who work in these areas, I would recommend consulting a good textbook such as the one by Milkovich and Newman (see reference section).

The bottom line is that, when considering pay-for-performance plans, employers should devote some resources toward the performance measurement system to ensure that the incentive system is credible. This is particularly crucial if significant bonuses or penalties are based on subjective measures.

References:

Baker, George P., Michael C. Jensen, and Kevin J. Murphy. “Compensation and Incentives: Practices vs. Theory.” Journal of Finance 3(1988):593-616.

Milkovich, George T. and Jerry M. Newman Compensation , 6 th Edition. Boston, MA: McGraw-Hill, 1999