November 19, 2014

Incentive Pay for Congress

Eli Dourado

Former Senior Research Fellow
Summary

Incentive pay is not perfect — it isn’t perfect in the private sector, nor would it be perfect in the public sector if my proposal were adopted. The chief virtue of a performance bonus for Congress is that it would be so cost-effective that it wouldn’t need to be perfect.

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Most large enterprises use incentive pay like performance bonuses and stock options to better align the interests of employees, especially top managers, with those of the shareholders. To be sure, these compensation systems are often gamed, and CEOs sometimes receive a large payout even if their performance disappoints. Yet despite these imperfections, incentive pay is an indispensable tool — even startups and privately held companies, which have the strongest reasons to organize efficiently, use it extensively.

We don’t offer incentive pay to members of Congress, but perhaps we should. Like shareholder capitalism, representative government creates a principal-agent problem: no matter how much politicians wrap themselves in the rhetoric of public service, their interests are never quite our own. Voter irrationality compounds the problem — members of Congress usually do not literally enrich themselves at the expense of voters; rather, they play to voters’ worst biases in order to get re-elected, often at the expense of good policy.1

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