Incentives

Thinking in Systems¹

If you want to understand the deepest malfunctions of systems, pay attention to the rules and to who has power over them

Within a business, monetary incentives are the oil that greases the engine. Some will argue that people “should” do their work for motivations outside of compensation. This gets framed as “If you are a good leader your people will have a passion for work outside of their paycheck” or that “as a manager you must find what motivates your team outside of compensation”. This is nonsense. Look to the investors and decision makers, investors rarely are putting up money for anything other than a ROI. There are professions and individuals for whom compensation is not a motivating factor. However, for the majority of workers, compensation is the reason they are there.

Stated Incentives vs. Real Incentives

Yossi Kreinin points out that what managers say is important, but what they value, are often not the same thing. For example, a manager may say they value maintainable code, but they will incentive and reward on time delivery. All smart employees will cut corners to deliver on time. Therefore, you should assume that your employees will act according to rewarded incentives even if you make statements to the contrary².

When monetary incentives “fail”

Monetary incentives introduce the rules of the road within a company. For example, you may be offered an equity package that vests over four years. At a high level, the company is trying to create operating predictability by expecting that they can depend on you to choose the monetary incentive for that period and stay with them for the four years while they grow. More simply, they de-risk your attrition in that period and a norm is established that people are going to stay to extract their value.

What’s interesting is when this norm fails, when people walk away from a compensation award. The business and leaders are often baffled by this behavior. An example from pop culture is Dave Chappelle. In the early oughts, Chappelle had the hottest TV show and was a cultural icon. He walked away from the show due to ethical concerns in it’s third season and a reported $50 million contract. I remember the collective bafflement at the fact that he could walk away from that sum of money and the popular art he had created.

1. Meadows, D. H. Thinking in Systems: A Primer. (Chelsea Green Publishing, White River Junction, Vt, 2008).

2. Kreinin, Y. People can read their manager’s mind. (2015).