Incentive Systems: Markets, Medicare, and Your Business

"Markets and Medicare" is a great article in today’s Wall Street Journal by my good friend John Goodman, president of the National Center for Policy Analysis.  The article has value beyond the Medicare debate, but let’s first key in on those issues.  Dr. Goodman explains how medical costs can be lowered and health outcomes improved by freeing doctors, freeing patients, and freeing entrepreneurs.  Our rigid compensation system often will not pay for the most cost-effective treatment methods, so we get locked into expensive and less effective treatments.  Not good, of course.

If you’re not interested in Medicare, here’s how you should read the article:  your current relationships with employees, vendors, joint venture partners, and customers may also be too rigid.  If someone in the network of relationships around your company has a new idea, will the compensation structure allow that idea to flourish?  Do cost savings techniques get rewarded, especially if they increase customer satisfaction?  It may be time to take a fresh eye to your contractual arrangements.

The essence of economic progress is the Trial and Error economy (described in a series of articles listed here, my favorite of which is this one.)  Successful companies set up systems to encourage lots of little experiments in cost savings and customer satisfaction.  The experiments measure results, so that the winners are pursued, the failures are dropped, and progress is continuous.