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:

  • Risk/reward contracts: In the future, learn from this situation and negotiate risk/reward contracts if you can. These have to pay out more than what the contractors can earn from hourly work, if the contractors meet specific, tangible milestones before their due dates, and as much as they would earn if they make their due dates. And they still have to pay a reasonable hourly amount, too -- these can't be the equivalent of pure-commission sales compensation.
  • Socialization: On the contractors' side, this is called "going native." On your side it's a matter of encouraging contractors to think of themselves as being part of the team and part of the company. The more they feel an emotional attachment to your company, the project, and their pride in the project's outcome, the more likely they are to work hard in spite of their perverse incentives.
  • Future carrots: Depending on the nature of your department, you might make it clear that the better they do, the more likely you are to invite them to the next dance. This works in proportion to how plentiful other work is at the moment.
  • Direct conversation: Whatever else you do, take the time to have an honest, non-accusatory conversation about the situation you all are in. Simply making your contractors aware that their incentives are at odds with their professionalism; that you recognize the difficulty of the situation; and that you appreciate their professionalism in working hard anyway can go a long way toward ameliorating the problem.

This last point is an excellent example of a basic leadership principle: Most of the time, most people will live either up or down to your expectations.

Which means it's important for you to make your expectations clear and for your expectations to be high.

- Bob