April 13, 2006

It's About Incentives: The Economics of Blog Pay Structures

[In light of the debate between flat-fee v. rev-share pay systems, I thought that we at BizNicheMedia should try to explain our thinking on pay structures, how they affect an individual writer, the costs and benefits of a particular system, and finally what we think the best solution is.]

The Problem
Why do many network owners blog themselves rather than outsourcing...for some it may be that the pleasures of blogging just outweigh the time costs. But I would venture to say that for far more bloggers the problem is one of incentives.  Put simply, many network owners do not know how to properly structure their payment systems and as a result of this inefficiency often find that writers are given perverse incentives which run completely counter to the ends of the blog owner.  Frustrated, many blog owners decide to write the content themselves...and in doing so drastically lower the scalability and thus the growth potential of their network.  On to analyzing some of the most common problems...

The Flat-Fee System
As the owner of a blog it is in your incentive to make the blog as good as it can be purely in terms of revenue generation.  In light of the continuing advancement of the SE algo's, increasingly that means providing actual good and interesting content.  But, as we all know, good content takes time and effort.

On the other hand, a staff writer's incentive (like all humans) is to act in a cost-efficient way from his/her point of view.  That means, exerting as little effort (energy/time in writing) as possible to reap the most benefit ($$).  So given a per post payment structure a writer will produce as much content as he can at the lowest effort (above a certain minimum necessary to just keep his/her job).  This leads to the type of low-quality garbage lovingly referred to as splogs (e.g. BizNicheMedia for its first few months).

Straight Commission
On the other extreme is a straight commission position (something akin to 'rev-share').  The problem here is an economic principle known as 'future discounting' as well as risk aversion.  What this essentially means, is that for those who are capital poor (not a lot of cash in the bank account) will value a guaranteed salary more than the hope of a bigger but non-guaranteed long term payout  (the richer you are, the more you can afford to take risks with the same amount of money because if things don't work out you won't starve).

So from a strict quality perspective you want your staff to be on a pure rev-share model (because writers' incentives will align precisely with yours--making the blog earn more $$$).  The problem is that most writers are relatively capital poor (Writers dont send me hate mail, I don't mean you are broke, just that individual employees typically have less cash on hand that the organizations which employ them).  In light of this difference in capital as well as future discounting, we should expect that the rev-share will be particularly distasteful to the professional blogger simply because they cannot afford to work for a pittance until the blog picks up traffic and revenue.  (This is especially true in light of the sandbox delay). So if we assume that individual writers are behaving rationally (that is, self-interestedly), a pure rev-share model will get the hobby writer but simply cannot attract quality professional bloggers early in the life of the network. [A rev-share model also lowers the network owners profit ceiling, an issue dealt with earlier by Andy.]

So on the one hand, we have a pay-per post that encourages garbage content, whereas on the other hand we have a rev-share which cannot attract professional writers and lowers the profit ceiling drastically.  But there is yet another concern...

The Problem of Consistency
The final consideration is posting consistency.  A blog cannot succeed without regular posting.  But, it is in the incentive of all people to discount the costs of future work (which is why all people are procrastinators) and thus wait to complete any quota until the last few days before it is due.  So, a blog which pays writers a fixed monthly salary with a minimum posting of say 20 posts per month, will see a great number of those posts on the last days of each month, meaning a great number of days early in the month get no postings.

But, once again the well-tailored payment structure offers a solution.  Instead of offering strict monthly quotas, a writer's salary structure should have weekly posting quotas built in.  So, by having a writer post a minimum of 5 posts per week a blog network owner is guaranteed to have the posting spread more evenly. 

Enforcement of Penalties
Of course, there is the problem of enforcement.  And no amount of guilt/worker pride will work for too long.  So, we resort to the almighty dollar and include in every contract a penalty clause.  This penalty clause must be significantly greater than the average posting cost.  Because a penalty clause which imposes a cost equal to the payment equivalent in salary will allow a writer to make a cost-benefit analysis which says, "if I write this post I will earn an extra X dollars.  But, if I don't write this post and simply fall short of my quota I will only lose X dollars from my salary for this month."  And depending on how the writer feels that day, he/she may decide to fall short. 

But, a payment structure in which the penalty is 4X means that a writer must consider: "If I make this post I will earn X dollars.  But if I don't make this post and thus fall short of my quota I will lose 4X dollars from my salary."  In this way, a blog network will create a positive financial incentive for a writer to meet his/her quota.  And while this penalty system may seem initially harsh, it should be clear that a blog network is relying upon a writer's performance and that by failing to meet their quota a writer is likely harming you and your company at a rate of even greater than 4X.

The Magic Formula
So, in balancing the costs/benefits of a flat-fee, pure incentive, and penalty system, the best solution is a blend of these payment structures.  Depending upon the risk aversion of a particular writer the figures can change, but essentially the best payment structure is somthing like:

  • 80% fixed salary
  • 20% discretionary bonus contingent upon writing quality
  • Weekly posting quotas
  • 4x Penalty structure

The point is to provide sufficient stability in payment rates such that you can attract professional writers, but still maintain a sufficient motivation for quality in the form of a bonus.  And finally, to tackle the problem of posting regularity include a penalty clause which is a multiple of the per post rate.

Final Note: Always make sure you are upfront with your staff about the precise terms of the employment agreement as well as what is motivating the specific terms.  If your staff is smart, they will understand the payment incentives anyway, so being upfront makes for a more cordial and professional business environment. 

--
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April 13, 2006 in Business Issues | Permalink


Comments

Thanks, this was a real breath of fresh air on a subject I've been thinking about a lot myself--and getting into a lot of nasty, murky debate over. As an editorial manager, I've had the experience of relying on freelancers for 75% of my content while pleading with a management that refused to consider locking in their continued contribution with a formal contract, even after we got hit with a Tasini suit. Then, when the paychecks stopped coming on time ... Also, as a freelancer myself, well ... thrice bitten, infinitely shy.

Posted by: Colin Brayton | Apr 14, 2006 1:53:04 PM

I agree Colin that reliable payments, from the writer's perspective are one of the biggest hurdles to get over in the blog outsourcing world. From the writer's perspective there is a definite fear that no payment will come...ever (which I have heard happens ALOT). On the other hand management fears if they advance a writer's salary he/she will take it and run (which happens too...I know). Something we try to do is to provide new writers with access to some of our more experienced writers so that they can vouch for us, and for some of our employees to provide a partial advance payment to share the risk. ---not a perfect solution but its all we have come up with---

Posted by: Rich | Apr 14, 2006 5:50:27 PM

U know, the amount of time I spend to research a single post sometimes simply does not justify the pay. I then wonder, "Would I really put in all this effort for just $$??" And the answer is , "No, I put in this effort because for me, writing is not about $$, it's about caring." I care about my writing - for me, the thought of presenting a substandard article is unbearable. I feed on my writing; I grow with my writing. For me, writing is what breathing is to other people. And of course, I need my readers, just as an actor needs his applause. I need to know that people are reading and appreciating what I write - that is the best motivator.

I'm just not happy when I'm not writing (okay, also reading - I have to be either writing or reading in order to be happy). When I'm cooking, (something I hate to do - my poor kids!) I wait to get it over with so that I can go back and write. I postpone cooking till I'm so hungry I can't ignore it any longer. So, if your writers think like this, a flat pay structure is better. They are already as motivated as they ever will be - becuase they love what they are doing, and care about quality. Then the incentive thing simply irritates them. :)

Posted by: Mini | Apr 16, 2006 12:00:31 PM

Mini,
It's no surprise (for those of us that know you) that you feel this way. Truth be told, however, I think that while it is a definite plus to have people who take great pride in their work on its own right, basing a business model entirely around that expectation is not ideal.

In my opinion a better method is to seek out people who take great pride in their writing, but at the same time give those individuals financial incentives to succeed which supplement their personal motivations.

But like I said, that's just my opinion and you are free to disagree.

Posted by: Rich | Apr 16, 2006 3:33:34 PM

I too hate writing crap, no matter whom I'm writing it for. But that doesn't mean I don't do it. It happens. And I've written for (local) magazines for free, before the Internet, so it's not always about the money.

But you have to consider that the cost of publishing on the Internet is a lot lower than in print. That means more writers can write and publish their own content. Will they make any money from it? Probably not, unless they work very hard to promote their site, constantly improve their writing,and give their readers what they want.

So why would any blogger aspiring to be a professional writer want to write for $4-7/post? Why? Because it's time in the trenches - which all writers in the past 100 years seem to intuitively know is a necessity in the business. Print may have paid $20-100 per short article, but current blog network revenue models just can't support that kind of pay per post.

But as a network publisher, you should never believe that writers will all stick with you. At some point, they are going to need to actually make enough for a living. If they can't do it blogging for you, they'll have to blog for themselves, move to print, or find some other career. (How many posts a month would you have to write, at $4-7/post, to be able to support a family of two children? Seriously think about that.)

Two of the highest-paying writing professions, on a more consistent salary basis, are and have always been copywriting and technical writing. (The latter happens only if you know what you are worth; there are tech writers who get ripped off.) But both professions are creatively unrewarding for me. When I was a tech writer, I couldn't go home at the end of the day and write my short stories. I was unable to.

My long-and-winding point is twofold:

(1) Most good writers write because it's a burning desire. But unless they have an extremely supportive and/or wealthy spouse, they eventually need to make a living. Given that most print writers never make enough to live on, why would blogging be any different?

(2) Blog network revenue models (and rosters) are very likely going to go through great upheavals. All of the current models have serious flaws. (Sorry if I offend you, but of the hundreds of bloggers and network owners I've read in the past year, none of them have been in publishing for as long as I have. This is simply my observation as both a writer and publisher.)

I think that the only really supportable model is going to be one similar to TV - where all the revenue is provided by advertisers, but production crews and cast members still get paid enough to make it worthwhile to them - earnings they can live on. We're aways off from this kind of revenue, and it means that many current networks will probably bite the dust.

Oh, and don't expect to be selling DVDs of Season 4 of your blog, unless you're vidlogging ;)

Posted by: raj | Apr 17, 2006 12:26:01 PM

It is a very interesting discussion. I am a writer and i write for Know More Media blogging network. What I touch is that blogging has good potential for anyone willing to work hard. My attitude towards blogging is a bit different than most people. I think that blogging is a new field and if i want to shine here first I must learn the trade like any other profession.
If I can learn it very well then there are many opportunities.
Of course, money is the most important factor behind any job. However, I think that the management behind a blog network must know how to encourage their writers.

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