Incentivizing Politicians to Think Long-Term

As we are about to amend our Constitution this year, I have been thinking a lot about better ways to compensate our elected officials. What’s wrong with how we compensate them now? Let’s look at the problem with even the best cases - many working democracies such as the United States, Australia, Spain, France and the United Kingdom are struggling with crushing levels of debt.

How did they get to this situation? Politicians and their parties are motivated by their desire to get elected and reelected. To do this, they push policies that are popular with their constituents - often these are social services such as healthcare and pensions. Often these policies end up costing the government more than its revenues, the deficit of which is made up with debt, which after a few decades balloons to the gigantic amounts they have to deal with today.

In businesses, a basic way to encourage an employee to do the right things for his job is to align his compensation with the desired outputs. For a salesperson, it would be a commission based on the sales he brings in. For service workers, they might get a bonus based on customer satisfaction surveys. In a factory, workers might get a bonus based on the number of units produced or from a low defect rate.

Senior management compensation is tricky, since they need to make decisions that will benefit the company in both the short-term and the long-term. Usually this achieved by having a portion of their compensation in company stock or stock options.

Given that our elected officials are our most senior managers for our nation or state, how do we design a compensation scheme that aligns these officials with both the short-term and long-term good of the nation or state?

The short-term portion is actually already fine as is - politicians and their parties are keen on winning the next election, and so will work on policies and programs that would please their constituency. The long-term is much trickier, because it involves making decisions that may not be popular, such as limiting social benefits in favor of long-term financial stability.

I’ll take a stab at it. I’m sure this leaves much to be improved, but I hope my proposal starts a conversation, and would be improved by people much smarter than me:

For every year of service that the elected official holds, he gets a bonus, but this bonus is only awarded to him 10 years after that year of service. If he’s no longer around by that time, the bonus goes to his descendants or next-of-kin.

This bonus is taken from a bonus pool allocated in the budget every year. For example, say on the national level, there are 500 present or former parliamentary representatives eligible for the bonus, then that bonus might be divided into 500 equal shares. Maybe cabinet members, shadow cabinet members, and the prime minister should get larger shares.

How is the bonus pool calculated? Below is my formula:

{Government Revenues (taxes, customs duties, etc.) - Government Debt } x 0.1%

For example:

Say that in the year 2030, Government Revenues are at ₱ 2 trillion, and Government Debt is at ₱ 1.5 trillion. So the bonus pool will be:

{₱ 2 trillion - ₱ 1.5 trillion} x 0.1% = ₱ 500 million

Now, if there are 500 present or former parliament ministers eligible for the bonus, each minister gets ₱ 1 million, which is in the same range as executive bonuses in the business sector.

Now, it’s in the interest of the officials to limit the growth of government debt. Otherwise, the paying for the debt will be coming out of their own pockets!