Paying for Failure in Expert Advice

Abstract

A failed recommendation is visible; an unproposed project is not. How should an organization pay an adviser whose private confidence determines which projects reach the margin? We show that the least-cost instrument is protection after failure rather than a success bonus. Because risky advice selects the upper tail of confidence, success pay leaks to recommendations that would occur anyway, while failure protection is concentrated at the margin. We establish unique nonpooling implementation, show that full correction is never optimal, and, while advice still needs encouragement, find confidential internal review substitutes for explicit career insurance more effectively than transparent review.