Pay More For Results

A simple and robust way to get others to do useful things is to “pay for results”, i.e., to promise to make particular payments for particular measurable outcomes. The better the outcomes, the more someone gets paid. This approach has long been used in production piece-rates, worker bonuses, sales commissions, CEO incentive pay, lawyer contingency fees, sci-tech prizes, auctions, and outcome-contracts in PR, marketing, consulting, IT, medicine, charities, development, and in government contracting more generally. 

Browsing many articles on the topic, I mostly see either dispassionate analyses of its advantages and disadvantages, or passionate screeds warning against its evils, especially re sacred sectors like charity, government, law, and medicine. Clearly many see paying for results as risking too much greed, money, and markets in places where higher motives should reign supreme.

Which is too bad, as those higher motives are often missing, and paying for results has a lot of untapped potential. Even though the basic idea is old, we have yet to explore a great many possible variations. For example, many of social reforms that I’ve considered promising over the years can be framed as paying for results. For example, I’ve liked science prizes, combinatorial auctions, and:

1. Buy health, not health care – Get an insurer to sell you both life & health insurance, so that they lose a lot of money if you are disabled, in pain, or dead. Then if they pay for your medical expenses, you can trust them to trade those expenses well against lower harm chances.

2. Fine-insure-bounty criminal law system – Catch criminals by paying a bounty to whomever proves that a particular person did a particular crime, require everyone to get crime insurance, have fines as the official punishment, and then let insurers and clients negotiate individual punishments, monitoring, freedoms, and co-liabilities. 

3. Prediction & decision markets – There’s a current market probability, and if you buy at that price you expect to profit if you believe a higher probability. In this way you are paid to fix any error in our current probabilities, via winning your bets. We can use the resulting market prices to make many useful decisions, like firing CEOs. 

We have some good basic theory on paying for results. For example, paying your agents for results works better when you can measure the things that you want sooner and more accurately, when you are more risk-averse, and when your agents are less risk-averse. It is less less useful when you can watch your agents well, and you know what they should be doing to get good outcomes.

The worst case is when you are a big risk-neutral org with lots of relevant expertise who pays small risk-averse individuals or organizations, and when you can observe your agents well and know roughly what they should do to achieve good outcomes, outcomes that are too complex or hidden to measure. In this case you should just pay your agents to do things the right way, and ignore outcomes.

In contrast, the best case for paying for results is when you are more risk-averse than your agents, you can’t see much of what they do, you don’t know much about how they should act to best achieve good outcomes, and you have good fast measure of the outcomes you want. So this theory suggests that ordinary people trying to get relatively simple things from experts tend to be good situations for paying for results, especially when those experts can collect together into large more-risk-neutral organizations.

For example, when selling a house or a car, the main outcome you care about is the sale price, which is quite observable, and you don’t know much about how best to sell to future buyers. So for you a good system is to hold an auction and give it to the agent who offers the highest price. Then that agent can use their expertise to figure out how to best sell your item to someone who wants to use it.

While medicine is complex and can require great expertise, the main outcomes that you want from medicine are simple and relatively easy to measure. You want to be alive, able to do your usual things, and not in pain. (Yes, you also have a more hidden motive to show that you are willing to spend resources to help allies, but that is also easy to measure.) Which is why relatively simple ways to pay for health seem like they should work. 

Similarly, once we have defined a particular kind of crime, and have courts to rule on particular accusations, then we know a lot about what outcomes we want out of a crime system: we want less crime. If the process of trying to detect or punish a criminal could hurt third parties, then we want laws to discourage those effects. But with such laws in place, we can more directly pay to catch criminals, and to discourage the committing of crimes. 

Finally when we know well what events we are trying to predict, we can just pay people who predict them well, without needing to know much about their prediction strategies. Overall, paying for results seems to still have enormous untapped potential, and I’m doing my part to help that potential be realized.