Pay for Performance or Performance for Pay: The Economics of the Employment Contract from Roman Times to Our Time

Employment contracts are central to many current policy debates. New York City is experimenting with rewarding teachers based on value added in the hope that it will improve performance. Compensation practices in the financial sector are often viewed as a contributing factor to the financial crisis, resulting in increased regulation. At the same time, there are continued calls to reduce the public sector and rely more on market forces. In the 2012 Leon Levy Lecture, W. Bentley MacLeod, Sami Mnaymneh Professor of Economics and Professor of International and Public Affairs at Columbia University, discusses two approaches to compensation: “pay for performance” and “performance for pay.” When preconditions for market supply of goods and services are satisfied, then pay for performance is effective. But when performance is difficult to measure, there is a need to reward performance with pay. MacLeod illustrates these ideas with examples taken from the management of Roman villas from the time of Columella and Pliny the Younger, and explains why the lack of effective management may be a key factor in the poor performance of schools and financial markets.