This “piece”:http://www.portfolio.com/views/blogs/market-movers/2008/04/01/blogonomics-valleywags-pay by Felix Salmon on the problems that Gawker Media is encountering with pay-per-pageview is pretty interesting.
Golson’s take-home pay is so much larger than his base salary that his base salary ($2,500 a month) has become basically irrelevant. Instead, he’s been relying entirely on his PVR of $9.75 per thousand pageviews – a rate which has seen him taking home more than $4,000 a month so far this year. For Golson, then, his realistic base salary is in the $4,000 range – much higher than the $2,500 which Robischon is referring to. … The problem here could have been partially fixed if Robischon had decided to give Golson a more realistic base salary to begin with. But Robischon’s boss, Nick Denton, wants fixed salaries to be as low as possible: he hates it when a writer doesn’t justify his salary with pageviews, and the best way of ensuring that situation never arises is to make the fixed salaries as low as possible.
This PVR is being lowered, leading to a strong reaction from Golson and others. Salmon explains their anger in terms of psychological mechanisms such as loss aversion, which are indeed applicable. But I think that there are two other things going on, both of which have to do with the economics of piecework. And after all, paying people on the basis of the number of pageviews their articles receive is a glorified version of piecework.
In many ways, piecework appears to be a more efficient means of pay than, say, providing a fixed salary. It would appear to align the money paid to the employee more closely with the revenues generated by that employee’s additional effort than would conventional wages. Hence, I presume, Nick Denton’s detestation of big fixed salaries – they don’t necessarily maximize page-views and advertising revenue. You might expect that in an ideal world, all employees would be paid on the basis of a particular form of piecework pay – that is, they would receive compensation directly commensurate to the revenue generated by each piece that they created.
But there are two problems with this. First, the revenue generated by each piece may be affected by factors extraneous to the effort provided by the worker. If the revenue generated were, for example, to increase for purely exogenous reasons, the compensation received by the employee would also increase, without any additional effort on his part. From the point of view of the employer, this would be a simple redistribution of profit from herself to her employee without any compensating benefits in terms of increased effort etc. A rational boss would seek to resist this.
The second problem is that the employer, even apart from these issues, has difficulties in committing to reward piecework properly. WUSTL political scientist Gary Miller’s _Managerial Dilemmas: The Political Economy of Hierarchy_, a book that I’ve repeatedly recommended, gives a nice account of this problem. If employees provide full additional effort at time _t_, providing a nice bonus for both employer and employee, they have, in effect, revealed the maximum degree of effort that they are able to put into the work. The employer then has an incentive to lower the piecework rate at time _t+1_ so as to increase her share of overall revenues, while demanding that the employee continue at the previous rate, or be fired. A rational worker will therefore not make full effort at time _t_, figuring out that he will be screwed over later if he does. Miller discusses case history evidence that suggests that this really does happen. This helps explain the fragility of piecework systems – while they are in principle more efficient, they only work properly if they are supported by interwoven set of commitments and expectations that are quite hard to maintain in a capital-dominated market economy. The political economy of hierarchy, as Miller says, is important to explaining why. This is also part of the reason why most of us get wages rather than piecework pay (another reason is that the value of our output is often difficult to measure directly, but that is another set of issues).
From a superficial reading, it would appear that Gawker Media faces both of these problems. First, the exogenous factors problem:
The Denton plan is particularly brutal in the case of Wonkette, where PVRs are being slashed quite dramatically this election year. On a logical level, this makes sense, but on a psychological level it can be extremely demoralizing.
Wonkette is obviously going to get more pageviews, as do most politics oriented sites, during an election year, without any additional effort from the employees. Denton here is acting to make sure that the windfall surplus goes to him rather than his employees.
Second, the commitment problems.
If things go according to Denton’s master plan, Gawker Media writers see their take-home pay rise steadily from month to month. Every three months, there’s a small step down, but over the long term the secular increase in pageviews more than makes up for the quarterly decrease in PVR. … It turns out that Golson got 557,469 pageviews in March, which equates to a total paycheck of $5,435. That’s well over double his base pay. His colleague Nicholas Carlson earned $9,025 for the month, in which Valleywag as a whole got just over 5 million pageviews. That’s an impressive rate of growth, but it does help explain why Denton might want to bring Valleywag’s PVR down towards the levels seen in the rest of Gawker Media.
Here, I don’t think one needs to invoke mechanisms of loss-aversion (although they may play an important role in practice). What appears to be happening is that the pageviews for writers working for some of the Gawker Media websites are rising substantially over time, even apart from the conjunctural factors affecting Wonkette etc. Presumably, a significant amount of this is due to the employees’ efforts; up to now, they have been benefitting substantially from those increases in pageviews. Denton is effectively trying to reset the compensation system so that (a) employees’ overall compensation only increases at a relatively slow rate, but (b) they are still incentivized to produce more pageviews, because most of their compensation will still depend on how many pageviews they produce, and, most importantly, (c ) they will get much less for each individual pageview than they used to under the old system, and Denton will correspondingly get more. This seems to me to be exactly analogous to the commitment problem that Miller describes. It’s entirely unsurprising to me that employees are up in arms about it, even apart from loss aversion, as it implies that any further productivity gains they make are likely to be pocketed by the proprietor rather than returned in part to them. If they had been rational, perhaps they wouldn’t have busted their asses to help produce this outcome in the first place, but in any event, I suspect (I could be wrong) that Denton is about to be introduced rather abruptly to the disincentive effects of broken implicit commitments.