Predictable Problems for Performance Pay

One area where the principles of economics may aid professions is in the area of designing incentives and payment. Yet my cursory review of the manner in which the emoluments of lawyers, doctors, teachers and other professionals are designed shows that they are often informed by assumptions that may not be sensible to a dispassionate reviewer outside the profession.

Judging the performance of doctors illustrates the dilemma here because medical care is expensive. Oversight institutions therefore design systems to ensure that the doctors have an incentive to perform better by ensuring that the material outcomes such as mortality rates and hospital stay is reduced. Dr. Sandeep Jauhar writes in the NYT about the schemes that doctors have adopted in response to pay for performance schemes in hospitals in the United States.

The essay simply illustrates some principles that any student of economics would advise an administrator going out to measure performance. The first is that all incentive schemes are likely to lead to unintended consequences such as doctors avoiding surgery on the most morbid patients in order to drive up survival rates and other measures that are being monitored. As John Kay states here, over time, the metrics are pursued as an end to themselves as opposed to being viewed for their original intent. As stated here, measuring performance precisely is more nuanced than any simple algorithm or metrics can ensure because professionals quickly learn to game the system.