Still, some modes of agent supervision and incentivization will be more cost-effective than others. Hiring a full-time inspector to constantly watch and inspect the work of each employee might be extremely effective in ensuring that employees don't slack off, but it is usually too cost-prohibitive to be a viable option. Encouraging employees to work in teams may be a more cost-effective model, with the thought that there will tend to be group policing against free-riding slackers. (But if the entire group goes bad, then there is another set of problems.) Performance bonuses are yet another popular way of ensuring appropriate high effort.
Performance bonuses can cause their own separate problems, however. For example, bonuses paid out at the end of a year for work performed during that year encourage short-term thinking in employees who are motivated to do the flashiest projects that will get the most management attention for the greatest bonus. Of course, this isn't making any news: arguably, the present financial crisis was in part caused by agents who had unfortunately short-term views. From the point of view of someone who stands to receive a hefty bonus for getting deals done, the natural incentive is to get lots of deals done and to do so sooner rather than later even if the quality of the deal is sub-par; if the deal goes south in 5, 10, or 20 years, there will typically be no clawback of the employee's bonus.
If I am right that there is in some cases or industries this phenomenon of performance bonuses causing these types of distortions in agent performance, then I have two ideas for fixing the problem. Those ideas are these:
- Make bonuses subject to progressive clawbacks contingent on the failure of the employee's work-product. So, to stick with the financial example, if the deal goes bad within 1 year, 90% of the bonus is returned; if in 5 years, 10% is returned. (Made up numbers, but you get the idea. The clawback percentages could be calibrated to create the optimum amount of incentive to act foresightfully.)
- Provide some portion of the performance bonus in a deeply retrospective manner. E.g.: after five years, your deals over that period will be reviewed and you will receive some bonus depending on the success of your work over time. Incidentally, deeply retrospective performance bonuses will encourage long-term commitments from employees to a particular principal, which will further enhance the principal's position.
The examples given are loosely from the financial industry (since that industry has caused so much economic wreckage from so much lack of foresight), but I think the principles might work in other spheres as well. Of course, this idea has its costs -- reviews at the space of five years are not costless, and success-criteria would have to be defined in advance -- but it may be a cost worth paying for the incentive to longer-term thinking which it provides.