Library Research Metrics and incentives
The Work You Don't Pay For Gets Dropped
Holmström and Milgrom showed that incentive pay decides where people put their attention, on top of how hard they work. Pay on the part of the job you can count and the part nobody measures gets less of it.
Bengt Holmström and Paul Milgrom, 1991
What they were looking at
How many jobs on your team come down to one task? Not many. A teacher teaches, and also gets students ready for the test. A factory worker turns out units, and also looks after the machines. A salesperson closes deals, and also decides which deals are worth chasing.
Economics already had a good model for paying someone to do one thing. Bengt Holmström and Paul Milgrom extended it to people doing several things at once, and used it to look at teacher pay tied to test scores, piece rates versus taking care of the equipment, in-house versus independent sales forces, and how jobs get designed.
What they found
“incentive pay serves not only to allocate risks and to motivate hard work, it also serves to direct the allocation of the agents’ attention” Holmström & Milgrom (1991), p. 25
So when you pay someone strongly on the task you can measure, their attention moves to it and away from the tasks you can’t. How strong should any one incentive be, then? It depends on everything else in the job.
“the desirability of providing incentives for any one activity decreases with the difficulty of measuring performance in any other activities” p. 26
And sometimes the best answer is no incentive at all.
“an optimal incentive contract can be to pay a fixed wage independent of measured performance” p. 26
A footnote on p. 25 cites a 1989 news story about a ninth-grade teacher in Greenville, South Carolina, caught passing statewide test answers to her students “in order to improve her performance rating.”
Holmström shared the 2016 Nobel prize in economics with Oliver Hart for their work on contract theory.
What it means
Strong pay on a measured task changes how the rest of the job gets done, because it pulls effort away from the work nobody counts. So what do you do when the important work is hard to measure? You can find a way to measure it, you can soften the incentive on the easy count, or you can split the job up so each role has one task you can measure.
Where it shows up in a revenue team
- Pay strongly on lead volume and effort moves away from lead quality, which nobody’s measuring.
- SDRs paid on meetings booked, account managers paid on renewals no matter the size, marketing bonused on MQLs. These are all volume-based KPIs, and each one points your team’s attention at the count.
- Measure the hidden task. Track value per lead, or what each month’s cohort of new accounts returns a year later, and the job nobody was measuring becomes one you’re measuring.
- Or mute the incentive. Sometimes a smaller variable share is the better plan, because it stops pulling attention off the work you can’t count.