What’s the incentive?

In my recent YouTube video, I discussed how hourly rates put clients’ and freelancers’ incentives at odds with each other. Clients are incentivized to move fast, to save money. Freelancers are incentivized to move slow, to make more. Day rates, on the other hand, are a fixed fee that get everyone working hard for the whole day. (Check out that video here). 

It’s interesting to consider the underlying incentives built into contracts and working arrangements. Everyone says they’ll work quickly while prioritizing good work, but this only lasts so long. Eventually, people get tired and stressed. Eventually, they lean toward one or the other. 

Blair Enns published an interesting article about performance-based fees; how in traditional contracts (billed based on time and materials) the incentive is to “go slow and make things more complex.” He contrasts this with performance-based contracts, in which the product has to work and generate revenue quickly. 

When designing business systems, ask yourself: what is the underlying incentive here? Not because people are dishonest or greedy, but because they revert to survival instincts when they get tired and stressed.