Incentives

Supported by Greenhaven Road Capital, finding value off the beaten path.

In his podcast with Patrick O’Shaugnessy, Brent Beshore explained how he’s amended his view on incentives and rationality. Beshore’s shifted to a more local approach. The view from ten thousand feet is that doing drugs is bad. The view from the street is different. The same incentives are in play, but the weight has shifted.

Incentives are unique and variability and that means one-size-fits-all solutions are difficult (or impossible). In the 1990’s the government thought CEO pay was too high because companies were laying off their workers. The solution was to cap pay as a deductible expense at $1M/year. Yet companies wanted to pay more, hence the stock option.

This will incentivize results! We did it!

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Well, the 1990’s bull market ripped upward and we’re stuck with correlation and regression models trying to piece things together. In effect, how much of a tailwind did that market provide?

Jack Schwager warns us about tailwinds. Kara Swisher said this about people at Google who move to Yahoo!?. Ben Horowitz looks for tailwinds on resumes. Warren Buffett compared it to ducks on a pond. Did ducks rise because of the tide, or because they flapped their wings?

Finding good incentives isn’t easy, but this is a solvable problem. In Think Like a Freak Stephen Dubner suggested avenues for ideas. Let’s look at them.

1/ Figure out what people really care about.

Baby I don’t need dollar bills to have fun tonight
(I love cheap thrills)
Baby I don’t need dollar bills to have fun tonight
(I love cheap thrills)
But I don’t need no money
As long as I can feel the beat
I don’t need no money
As long as I keep dancing

In his short biography of Napoleon Bonaparte, Paul Johnson writes that Napoleon figured out incentives. He gave the men what they wanted:

“The armies identifies their interests and their future with Bonaparte, and the lower the rank, the more complete this identification became.”

Napoleon let his men send home the spoils of war. They could fight longer campaigns because things were ‘taken care of’ at home. He also promoted on merit, fraternized with his troops, and arranged rides rather than marches when he could. Napoleon gave the men the things they wanted.

And it’s not always money. Tony Hsieh wrote:

“I thought about how easily we are all brainwashed by our society and culture to stop thinking and just assume by default that more money equals more success and more happiness, when ultimately happiness is really just about enjoying life.”

There’s always a better answer than money. Money is only the medium. Good leaders will find the things people care about. Sometimes even on the cheap.

2/ Choose things valuable to them but cheap for you to provide. The book Getting to Yes is almost entirely about this idea. There is something you can give to the other ‘side’ that they value but you do not. Rather than quote a passage, let’s look at a nursery rhyme.

Jack Sprat could eat no fat
His wife could eat no lean,
And so betwixt them both
They licked the platter clean.

Figure out what people care about (#1) and present the cheaper options.

What do people want? Recognition, time, freedom, food, options, appreciation, thanks, quiet, shelter, love, less friction, more babysitting, time off, overtime, free time, time to think, twenty-percent time. Talk to people and you’ll find out their secrets.

Basecamp is a successful technology start-up that epitomizes this. Jason Fried and David Heinemeier Hansson offer the following; summer hours, paid vacations (trips and time), and sabbaticals. Why can they offer these things? Because time away from work doesn’t mean less work gets done. It’s not a linear equation. Fried said on the Product Hunt podcast:

“A lot of things we spend our time on is wasted…when we have our 32 hour workweeks, just about the same amount of work gets done as it does in 40.”

What’s something people want? More time off.

What’s something cheap for Basecamp to provide? More time off.

Why is it cheap? Because the same amount of work gets done.

3/ Pay attention to how people act, they will give you clues. Let’s stay on campus. The story goes like this.

FOR IMMEDIATE RELEASE:

Old State University has expanded. New buildings for STEM and Underwater Basket Weaving (minor only) were built adjacent to campus. The buildings are modern marvels – LEED certified – but one thing is missing. There are no sidewalks. “We’ll come back next year and build those,” architect Felicia Jones told reporters, “after students have worn paths through the grass.”

This happened at Ohio State.

Sidewalks are a simple, concrete (see what I did there?) incentive. Walk here and avoid dirt, debris, and wet socks.

Yvon Chouinard noticed that women brought their babies to work or took time off because they couldn’t find babysitters. In response, Chouinard created a childcare program on the Patagonia campus. If you hired someone great, he writes do what you can to keep them.

More examples abound at our signals post. All you have to do is pay attention.

4/ Make incentives cooperative rather than adversarial. Choose an incentive that gets everyone rowing in the same direction.

In the early days of Nike, Phil Knight got his bankers and box suppliers behind him because they could succeed with him. Milton Hershey did this with the dairy farmers. Andy Weissman warns start-up founders what to expect. If a venture capitalist needs to return money to their investors, they need a lot of money. If that’s not what you want, said Weissman, don’t take money.

5/ People will not always “do the right thing.” No matter how carefully crafted, incentive systems won’t shake out perfectly. Not all college paths are paved and despite the salary cap, CEO compensation went up.

Any system (like incentive systems) is complex. “In complex systems, malfunctions may not be detected for long periods, if ever,” wrote John Gall.

Michael Mauboussin put it this way, “Complex adaptive systems effectively obscure cause and effect.”

Ben Horowitz wrote, “There’s no recipe for really complicated, dynamic, situations.”

Intended design is not actual use.

6/ Some people will game the system.

Let’s bring everything together. This is a true story.

My daughters earn an allowance from doing chores. Their compensation goes into a jar and they can spend the money on anything they want (#1 find something they value). Their favorite things are stuffed animals and tchotchkes.

They earn $1/day for things like feeding the dog, taking out the recycling, and picking up their rooms. I’d much rather pay them for doing these things than do them myself (#2 choose things valuable to them but cheap for you to provide).

My six-year-old daughter does her chores almost every day, but especially on days she can use her iPad. My eight-year-old daughter only does her chores on days when they are a prerequisite for using her iPad (#3 pay attention to how people act, they will give you clues).

It would be nice if I instilled a reason behind the chores. They love their dog but the connection between the dog needs to eat food so the dog can stay alive has not yet been made. They are motivated by money and screen time (#4 make incentives cooperative rather than adversarial). Also, as anyone who has been a kid knows, chores aren’t always correctly done (#5 people will not always “do the right thing”).

I offer one conciliation – a performance bonus. If they earn a mathematics flashcard PR I will do two of their chores. My younger daughter loves this. If she sets a record she will go through her list of chores and carefully delegate the most difficult ones. She makes steady progress so the system looks like this. I clean her room and put away dishes on Monday. On Tuesday – if she beats her record – she will “clean” her room and “put away dishes” and choose new chores for me. Of course, the things she chooses are easier because I just did them (#6 some people will game the system)!

Thanks for reading.

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