The Impact of Incentives

Shame on me for going through with this. I know better than to quote Wikipedia...but here goes, caution to the wind:

According to Wikipedia, an incentive (in economics or sociology) is any factor (financial or non-financial) that enables or motivates a particular course of action or counts as a reason for preferring one choice to the alternatives. It is an expectation that encourages people to behave in a certain way.

What is most interesting about incentives to me is that the impact is not always intuitive.

Take the section of Freakonomics that discusses the issue of late pick-ups, which negatively impacted a day care. The day care instituted a penalty of $3 per child for late pick-up. The result was an increase in the number of late pick-ups.

While late pick-ups were an issue before, many parents felt guilty about it. There was a disincentive for these parents. They did not want to feel guilty, so they did not leave their kids after the normal pick-up time. However, once the penalty was put in place, their guilt was negated. They could pay the $3 and feel guilt-free, quite a deal.

This is a great lesson. Setting incentives can be counter-intuitive.

Consider the adage, "That which gets rewarded, gets done."

Let's look at the explicit portion of that statement, which essentially is that if you reward a behavior, it will be done. The lesson here is that you want to set incentives that align with company goals and encourage behaviors beneficial to achieving those goals.

Now consider the implicit part: that which is not rewarded may not get done. We must consider both sides when setting incentive plans. Let's put it in story form to illustrate the point...(nice allusion to a previous post, right?).

Tom owns a store that sells high-end electronics, large HDTVs, home theaters, the works. He creates an incentive program that rewards the highest dollar total of sales at the store. At the end of the month, his sales have increased and things look good. However, he sees a decrease in repeat customers. He finds out the store down the block provides a much higher level of customer service, talking with clients to determine their actual needs, consulting with clients to ensure an optimal set-up, and even recommending less expensive products if necessary. Tom's sales people were only concerned with making the sale and moving on to the next customer. Tom incentivized sales in the short-term at the loss of long-term relationships with clients.

Similarly, when designing an incentive program for your company, you need to not only look at behaviors you want to incentivize, but also consider the other behaviors that are not getting reinforced. It is important to determine if those behaviors are necessary as well.