Economics of Tokenized Incentives 2: Selecting Effective Performance Metrics

The two essential criteria for an effective performance metric are:

When creating a pay-for-performance scheme, the most important design element is the choice of performance metric. A well-chosen performance metric can align the incentives of contributors with the goals of the platform, while a poorly chosen metric can be ineffective at best and encourage destructive behavior at worst.

-It should be well aligned with the goals or overall long-run value of the payer. This ensures that the actions participants take are beneficial.

Other incentive mechanisms, such as long-term relationships and reputation systems, are better at aligning the goals of payers and payees in Public Relations and similar contexts, even though they are less objective or precise.

-It should be well aligned with activities or behaviors that are under the control of individual payee. This ensures participants are motivated to act.