Pay-For-Performance and the Anti-Commons

There’s a lot of talk about pay-for-performance scenarios lately. Oh, heck, there’s always been a lot of talk about it. But with a new administration in place and higher ed insitutions tightening their belts, it’s newly back in play.

Which makes reading this article by Thomas Frank in the WSJ today interesting. Particularly this passage:

According to Bill Black, a professor of economics and law at the University of Missouri-Kansas City and an authority on dysfunctional financial systems, “It is the compensation system that has proved to be the weak point in everything critical that went wrong, that has produced a global catastrophe.”

At each stage of the disaster, Mr. Black told me — loan officers, real-estate appraisers, accountants, bond ratings agencies — it was pay-for-performance systems that “sent them wrong.”

I’ll admit, I have my problems with Frank as a theorist, even when he’s talking sociology. And Bill Black? No idea who he is. 

But this is really just the most recent iteration of this viewpoint, one that I believe will be relatively unchallenged when the history of this era is written. In the financial arena, as in our current health care system, no one manages losses or gains from end to end. The tragedy of the anti-commons is that in order to preserve the pristine state of  your deeded property you let your toxic sludge roll downhill.

When I was in software, it would be sales people, incentivized to sell specs we couldn’t possibly build. Then the sales sludge rolled down onto the programmers. Had we been incentivized to ship, had it been a major portion of our pay, I’m sure we would have shipped crap and pushed the toxic sludge onto support. I’ve seen that happen at other companies that tie major compensation to ship dates. 

And recently we see bank managers paid for the number of loans they get, so those loans can be quickly sold into tiered mortgage backed securities. The sludge rolls down to Wall Street. And now we, the public, will buy the sludge at above market rates to prevent economic collapse.

And in health care millions of dollars are spent not healing people or keeping them healthy, but in pushing them out of coverage. Doctors are rewarded for not referring people to surgery, for spending less time with patients, often with disastrous results. Just keep pushing them through — in a couple years the patient will have a new job (or no job) be on someone else’s insurance books. Until then — patch, patch, patch.

Ditching the Commons was supposed to get people to take better care of resources, and take a longer view of wealth. But in an anti-commons driven by performance pay, your best chance of survival is often not to keep the sludge from rolling onto your lawn, and certainly not to clean it up, but to make sure it keeps moving through at a decent clip.

Three examples, relatively simple: software sales are pretty simple to track, health care has well established metrics for general health and well-being, and billions of dollars has been spent modelling financial risk. Yet each pay for performance plan, wrongly designed, adds accountability and reduces responsibility.  

And education is even more complex, even more long term than these examples.

I don’t know what the answer is, but when we start talking pay for performance I plan on asking plenty of questions.

OK, battery dying…see you on the other side…

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