Imrecon

PAACTS is a framework for evidence-based policy-making in incentive regulation. It provides an objective way to measure and optimise the effectiveness of incentive policy.

PAACTS considers six dimensions of the incentive environment: Power, Alignment, Accountability, Commitment, Transparency and Security.

The central insight is that incentive comes from the alignment of interests, ensuring that the self-interested efforts of one party can be efficiently translated into benefits for the other.  The more those efforts are rewarded, the stronger the incentive.

We can measure this incentive ‘power': the proportion of the overall benefit from good performance that accrues to the incentivised party. ‘Power' and ‘Alignment' are the first two letters of the PAACTS acronym.

A PAACTS simulation plots and statistically measures both power and alignment in a value added ‘scattergram'. The scattergram plots the relative value of each simulated outturn, or the ‘payoffs', for the objectives of different stakeholders, usually in discounted present value terms.

The scattergram shows the diversity of outcomes, identifies the sorts of strategies that would optimise the interests of the incentivised party and outliers show where incentives are out of kilter with the achievement of regulatory goals. Optimisation of policy becomes better informed, measurable and demonstrable.

The other letters in the PAACTS acronym relate to the broader incentive environment: ‘Accountability' - how, for what and by whom are managers held accountable; regulatory ‘Commitment' - how confident can companies be that the promised additional rewards really will be additional; ‘Transparency' of performance information - will regulatory incentives be so lost in the accounting and other noise in reported performance that they fail to focus the minds of managers; and financial ‘Security' - will risk aversion and cash constraints dampen responses to economic incentives or will financial disciplines reinforce them?

PAACTS is a registered trademark.