Economics of Tokenizing Incentives | Choosing Effective Performance Indicators

In previous articles, we explained that pay-for-performance is useful when key expected outcomes cannot be specified in advance. In this case, pay-per-performance systems allow us to evaluate performance after the fact and reward contributors accordingly.

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When creating a pay-per-action solution, the most important design element is the choice of performance indicators. Carefully selected performance indicators can align the motivations of contributors with the goals of the platform, while poorly selected indicators are most efficient in the best case and can lead to disruptive behavior in the worst case.

Poorly chosen performance indicators abound. Even top companies with a lot of resources are not immune.

Wells Fargo has a well-known system in which branch employees are rewarded for the number of new accounts opened. The system was so successful in incentivizing account creation that employees had to open fraudulent accounts without customer consent. As a result, the system violated customer trust, created an unpleasant working environment for employees, and fined banks hundreds of millions of dollars.

Finding the right performance metrics can help blockchain platforms avoid costly mistakes. However, sometimes the best course of action is to use other incentives to reward the desired behavior rather than using performance rewards. This article outlines a process for determining whether a good performance indicator exists and how to determine it.

As the name suggests, performance indicators are designed to measure the contribution of participants in a performance payment system. By its nature, performance indicators must be variables that can be observed, measured, and verified, such as revenue generated by salespeople. In the context of the blockchain, performance indicators must also be readable by smart contracts. But simply finding variables that meet these conditions is not enough. As the saying goes: Not everything that can be measured is important, and not everything that is important can be measured.

The two basic criteria for effective performance indicators are:

1. It should be consistent with activities or actions under the control of the payee. This ensures that participants have the motivation to act.

2. It should be consistent with the payer's goals or overall long-term value. This ensures that the actions taken by the participants are beneficial.

Going back to the example of Wells Fargo, the bank hopes to generate more revenue by attracting customers to use more of the bank's services. In theory, employees at bank branches may help achieve this by reminding customers of services that benefit them and services that are up or cross-sold to these customers.

But the performance metric they chose-the number of new accounts opened-did not meet the criteria we discussed. Although the number of accounts opened is clearly controlled by the employees of the branch-they can open thousands of accounts at will-the number of accounts opened by customers is not closely related to the revenue that customers generate for the bank. In fact, 95% of the accounts opened under the incentive program have no profit at all. Improper selection of performance indicators will lead to organizational dysfunction, which Wells Fargo will clean up in the next few years.

These same basic standards can be applied in the context of a blockchain platform in which pay-for-performance can be used to adjust the interests of payers and payees.

For example, many projects are trying to use blockchain to mediate the advertising industry. The idea is that advertisers can find the source directly and compensate consumers for their time and attention without recruiting a large number of middlemen.

The goal of payers (advertisers) on these platforms is to direct consumers to the brand they are advertising and potentially keep them away from competing brands. When participants follow the ad and are persuaded to buy a product they wouldn't have bought, it's a victory for potential advertisers.

The performance metrics used in these systems typically vary around the number of seconds an ad is displayed on a participant's screen. The issue with this metric is very similar to the issue with Wells Fargo's account opening performance metric. It fits well with what the user can control, but it doesn't match the company's goal of paying. Participants can of course control how long the ad stays on the screen; however, screen display time is not a good indicator of attention, let alone purchase intention. For example, users can easily keep ads on their screens for long periods of time without even seeing them at all. For companies considering advertising on these platforms, this misalignment can be a problem.

It is important to note that sometimes it may not be possible to find performance indicators that meet both basic criteria. As a result, pay-as-you-go is rarely used in some cases.

For example, in areas such as public relations, it is difficult to find good indicators where there are many steps between the activities that a PR professional can engage in (such as advocacy with journalists and publications) and the client's goals ,increase income. In this case, any performance indicator that the payee might choose (from the number of connected publications to the number of features logged on to the increase in revenue) is problematic because it is inconsistent with the payee's goals or with the recipient Section's inconsistent behavior.

As a result, performance-based pay is generally avoided and other compensation arrangements are used. Other incentives, such as long-term relationships and reputation systems, are better suited to align the goals of payers and payees in public relations and similar environments, even when they are less objective or less accurate.

Blockchain platforms trying to use smart contracts or other mechanisms to simplify and intermediate transactions must carefully consider how these contracts are designed. Inconsistent performance assessment schemes may cause participants to abandon the platform and perform worse than expected or worse. In some cases, there may not be effective performance indicators that meet both of the basic criteria. Therefore, the team should consider a broader incentive structure rather than simply rewarding participants with tokens.

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