I have a very different approach to compensation. I think that the
key is to change compensation schemes frequently. The reason is that
any scheme can be gamed, and the longer you wait to change any given
scheme, the more effectively the participants will have gamed it. That
is one reason I think that "Pay for Performance," the newest miracle
cure for health care costs, will fail miserably. The doctors will be
able to run circles around the bureaucrats. In the U.K., they already
have–all of a sudden, 91 percent of doctors were receiving bonuses for
being above average.I think that the more Washington tries to regulate CEO pay, the more
it will create a disconnect between pay and performance. Regulation
will inhibit companies from frequently changing their incentive
systems, and that will give CEO’s more time to game them.
Here is the full post, which also covers Tim Harford’s forthcoming The Logic of Life, which you’ll hear more about in due time (it carries a blurb and recommendation from yours truly).
Kling is right about the distortions created by attempts at “Pay for Performance” in a regulatory context. In the private sector, however, a good incentive plan extends management’s time horizon. According to my research and experience on this matter, private sector managers clearly respond better to the certainty of long-term rewards for profitability than they do to the constantly shifting maze of rewards and constraints dictated by the brains at the center.
The ultimate reward system in terms of economic efficiency is the definitive, unchanging, long-term system that says if you create something valuable, you get to keep a share of it, i.e., capitalism.
What are your thoughts on pay for performance for the drug industry? Obviously some drugs would be easier (lower cholesterol) to measure but even drugs that are more qualitative would have an independent voice in doctor and patient feedback.
^^ nice blog!! thanks a lot! ^^
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