Within a system like an office, neighborhood, or team there are two main levers which drive behavior: culture and incentives. Culture, says Ben Horowitz, is what people do when they aren’t told what to do. Incentives are the rewards from actions. Incentives are easy to create but don’t always get the intended action.
One incentive might be fines for thin plastic bags. One potential action is customers switch to re-useable bags. Hey look! That’s was the plan.
Another potential action is using thicker bags. In this case the incentives led to the opposite anticipated actions: more plastic trash.
A family friend pays his kids for good grades. It works, but it’s likely a combination of culture and incentives. This is an incentive system that could easily go awry.
Another incentive that goes awry is rewarding for gross figures rather than net. This was the case in the record industry said Will Page:
“They would ship a platinum record because shipments were what qualified a platinum record. It wasn’t actually sales, if half-a-million albums came back to the factory gate it was up to the CFO to deal with the cost of returns. Once you create rules to play by people will bend those rules. If bonuses are related to platinum status and platinum status is related to shipments, then what do people do? They ship a million records.” – Will Page
1978’s Sgt. Pepper’s Lonely Hearts Club Band soundtrack was reported Platinum but was a sales bust. The following year the rules were changed and Platinum meant shipments minus returns within 120 days. That number has crept back down to thirty. It’s incentives all the way down!
A Platinum album is one million units. Gold half that. Album certification – ship Platinum, receive Gold back – feels like a thing of the past. But incentives are not.