When paid by the hour, a contractor's work ethic isn't a matter of economics

What can you do about this case of "perverse incentives"? A lot, even if you can't renegotiate the contract

Dear Bob ...

I'm sure this isn't a new situation, but it's new to me: We've launched a large project and are relying more on contractors than is normal for us. We pay our contractors by the hour, which appears to be industry-standard practice.

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And yet, I have an uncomfortable feeling that they aren't working as hard as the employees who are working side-by-side with them, and that their hourly pay has something to do with the problem.

OK, it's more than a feeling. My employees have raised concerns, and it's clear that when someone is paid hourly, working more hours means earning more money.

What can I do about this?

- Payer

Dear Payer ...

This situation goes back a long, long way. Tracy Kidder, in his classic "Soul of a New Machine" described a manager hiding the timesheets of his hourly techs because his programmers, being exempt, were earning less even though they held higher-status positions.

Economists call this situation "perverse incentives" -- what you want people to do is pretty much the opposite of what their economic incentives tell them to do. Given a choice between your imprecations (how's that for a word?) and their economic incentives, the latter has a much louder voice.

Here's what you can do: