Incentives Matter

Incentives for Panel Evals
Image by gtmcknight via Flickr

One of the things that I have learned over my few decades of “business-as-trench-warfare” experience is that properly thought-out and structured performance incentives are a critical component in getting people inside an organization to “do the right thing”, whatever that may be. Those may be economic incentives, however they don’t always have to be.

I recall one incident when new Executive VP was describing an experience at his former company, a multi-billion dollar global player — “all us sales folk listened impatiently to the CEO’s key note address at the annual sales conference. He was going on and on describing the company’s new strategies with all the requisite power point charts and graphs, and business-speak about synergies and shared values and all that stuff…. when he was finally done we raced away to a conference table, flipped open the information pack provided to us, threw away the 30 page strategy presentation and ripped out the 2 pages detailing the sales compensation plan. That 2 pages told us everything we needed to know about what was expected of us to earn our pay and bonuses, and made it clear about what type of behavior we would follow.”

Of course, what does happen with any incentive system is that we all (either consciously or possibly sub-consciously, for those of us who don’t like to admit that we work to manipulate outcomes) try to “game” the system, so we can maximize our reward. So intelligent design of incentives is a pretty critical aspect of getting the business outcomes you want to achieve.

There are a couple of innovative incentive schemes that I came across recently; this one is in Obama’s proposed 2012 budget that links issuing of “pay for success bonds” which effectively raise money from private investors which is then directed into specific projects run by charities or businesses. The return the investors make is then linked to the actual performance improvements seen in the specific project. Another is related to having multiple contractors work on a major project (a personal ID system for India and it’s billion citizens). This has 3 large vendors splitting the work in the following manner — the firm that does the fastest, most accurate job gets 50% of the work and the other two get 30% and 20% respectively. With allocation reassessments happening regularly this approach has a strong incentive to keep everyone sharp and working to improve.

It will be interesting to see how the above approaches are gamed by their respective participants¬† — gaming can be keep to a minimum with full transparency and regular reporting but that doesn’t always happen in the world of business. And for another perspective on incentives and motivating people, check out Dan Pink’s wonderful video on “what motivates us” from an earlier blog entry….

What kind of incentive structures have you operated within, and what kinds of gaming have you seen — any thoughts you want to share?


5 thoughts on “Incentives Matter

  1. Hey Tim,

    Excellent article

    As to thoughts, I remember a small section of a book called the paradox of choice mentioning that humans do not make rational decisions given the exact same odds; makes any game kinda uncertain

  2. Thanks for the comment, Ben. At an individual level I think we generally don’t make rational decisions — we are hard-wired emotionally and hence most of the decisions we make are based first and foremost in our emotional response, and then we rationalize why it is the “right” decision for us… our whole consumer based society is pretty much dependent on this feature of human decision-making!

  3. Excellent blog you have here.. It’s difficult to find quality writing like yours nowadays. I truly appreciate individuals like you! Take care!!

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