Original Link: Economics of Tokenized Incentives 2: Selecting Effective Performance Metrics

Author: Cathy Barrera, PhD

Summary

Pay-for-performance systems reward contributors based on measurable performance metrics. However, choosing the right metric is crucial. A well-chosen metric aligns the incentives of contributors with the platform's goals, while a poorly chosen one can lead to ineffective or destructive behavior. The post outlines two essential criteria for an effective performance metric: it should be within the control of the payee and aligned with the payer's goals. The post also highlights that in some cases, other incentive structures may be more suitable than pay-for-performance.

Commentary

The choice of performance metrics in a pay-for-performance system can significantly impact the behavior of participants and the overall success of the platform. Poorly chosen metrics can lead to unintended consequences, as seen in the Wells Fargo example. Therefore, it's crucial to choose metrics that align with the platform's goals and are within the control of the participants.

Actionable Insights

1. Choose Metrics Carefully: When designing a pay-for-performance system, take the time to choose the right performance metrics. Consider whether the metrics align with the platform's goals and are within the control of the participants.

2. Consider Other Incentive Structures: If a suitable performance metric cannot be found, consider other incentive structures. For example, long-term relationships and reputation systems can be effective in certain contexts.

3. Monitor and Adjust: After implementing the incentive system, monitor the outcomes and be prepared to make adjustments if necessary. If the system is not producing the desired results, it may be necessary to change the performance metrics or consider a different incentive structure.

4. Communicate Clearly: Ensure that participants understand the incentive system and how they can benefit from it. Clear communication can help to encourage participation and ensure that the system is used effectively.