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When Incentives Backfire

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In business, certain ideas have come to be treated as received wisdom.

One of them is “align goals and incentives.”

It sounds dirt-simple. If you want to encourage or incent people to do certain things rather than other things, then align their incentives with those things. Reward them for doing the desirable, punish (or do not reward) for doing the undesirable.

Praise the child for helping, discipline the child for misbehaving. Say “bad dog” for jumping on the sofa, say “good dog” and give a treat for heeling.

Increase the commission on the profitable product, decrease it on the lower-margin ones. Give the CEO stock options to incent him or her to increase the stock price. And so forth.

But this idea has an exploding-cigar component to it. In fact, it can be downright destructive.

In the recent Republican Presidential debates, one candidate suggested, with an “ain’t it obvious” kind of tone, that part of the answer to the US health care problem is to incent providers based on outcomes. We should pay doctors and insurance companies for improving people’s health, then they’ll work to improve patients’ health, thereby cutting health costs.

I mean, ain’t it obvious?

Look a little closer. It suggests that, as a doctor, the most attractive patients will be overweight smokers—because I can quickly improve their health. And I will work hard to get them to diet and quit smoking quickly, because I get paid more for showing fast results.

On one level, this is very good. It’s a form of social triage—focus on the highest improvement rates possible. Obesity and smoking are major health problems. What’s the problem?

The trade-off is e subtle shift in motivation for doctors. If everything goes through the money filter, where’s the motivation that keeps interns doing absurd things to their circadian rhythms for so long? What happens to bedside manner?

What happens to any sense of the purpose of medicine—which, since roughly Hippocrates, has been largely based on healing people? It gets replaced by the same motivation that drives MBAs to seek private equity jobs.

Not persuaded? OK, let’s move to religion.

What’s the mission of your local church, synagogue, mosque? Probably some form of “worship the lord and do good deeds.” Lets apply the incentives logic.

It suggests churches et al should do a religio-ethical baseline competency assessment before letting you join (“how many of the Ten Commandments would you say you break in an average month?”). Then measurements should be taken periodically to see how you are improving.

(I’ll just keep using “church” here as shorthand, please infer the intended political correctness).

If your minister/priest/rabbi shows good results, then his or her market value (salary) should increase.

Church by church results should be published, so that would-be members can make informed decisions about which church will give them the highest spiritual/ethical ROI on the least amount of invested time or payments.

If you’re a slow improver, then churches would be incented to dump you as an incorrigible recidivist (formerly known as “sinner”)—basically, an unprofitable case.

Consider tithing—the giving of 10% of one’s income to the religion. Let’s apply incentives. What’s in it for me? Maybe, if you tithe more, you get more back!  Sort of like frequent flyer miles, or volume discounts. If you tithe 12%, you get the superbowl tickets; 13%, the big Hawaii trip. And suppose you really demonstrate your holiness by taking a vow of poverty? Wow, that’s the big reward—a day’s free shopping at Neiman Marcus, no limits.

How about Boy Scouts helping that little old lady across the street? What’s in it for me? How much to escort you across, old lady? A nickel? What century you livin’ in?  Fuggedaboudit!

If you haven’t heard of Alfie Kohn, let me recommend him to you. Mainly a child educator theorist, he’s also written fascinatingly about the fallacy of incentives. As he puts it, “incentives work very well. They incent people to get more incentives.”

His key concept? Emphasizing extrinsic incentives—i.e. “if you do this, you’ll get that”—is responsible for destroying intrinsic incentives.

His killer example: a study of children playing. Researchers uncovered their favorite game—then offered them rewards for playing it.

The kids then lost interest in the game.

Trust vs. Incentive Compensation: What Joe Torre and the NY Yankees Have to Teach Business

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Let’s talk fundamentals: how to manage and motivate people in an organization.

Which statement do you agree with (from the New York Times)?

1. “[it is] important to motivate people, as most people in everyday life have to be, based on performance.”

2. “It’s not the money that is…the determining factor. It’s…the commitment and trust — because you can’t have one without the other.”

If you agree with the first, you’re agreeing with Randy Levine, New York Yankees President and lead contract negotiator. And with the majority point of view in business.

If you agree with the second, you’re agreeing with the most successful manager in modern baseball history, who just turned down the most lucrative offer in the major leagues—Joe Torre. But with the minority point of view in business.

“When I walked into that room, I saw businesspeople,” said Torre. Too true. The dominant view among compensation consultants, business schools and general management—basically—is that incentives help performance, and that the best incentive is money. Just like Levine said.

Both business and the Yankees see Torre as a unicorn—they refuse to believe people like him exist. Their denial extends to a refusal to acknowledge the fact that his 12-year superior performance was achieved without incentive clauses.

Alfie Kohn has written extensively about the harm caused by reward systems, in business and in education. “Monetary rewards definitely incent people,” he says “—they incent them to get more monetary rewards.”

What they don’t do is incent people to do things for their own sake. Like manage a great baseball team. Or develop great software. Or serve customers.

Really great performance doesn’t come from the extrinsic motivation of rewards—it comes from intrinsic motivation (this is frequently true even on Wall Street, in the business of money).

The hijacking of American business thinking by B. F. Skinner in this regard is astonishing. Despite massive evidence to the contrary (think Babe Ruth: “you mean you’ll pay me to play baseball?”), the mantra continues to be “they won’t play without that pay.”

Kohn cites a study in which children were observed, in order to determine their favorite game. Once the game was identified, the children were offered incentives to play that particular game.

Whereupon they promptly lost interest.

Kind of like Torre, who said he was insulted by making his compensation “incentive”-based. “I’ve been here for 12 years; I didn’t think ‘incentive’ was needed.”

For Torre, it was pride—in himself and in his work—which was demeaned by the Yankees’ rats-and-cheese model. In his words, “It was a very generous offer, no question about it. It still wasn’t the type of commitment that we’re trying to do something together as opposed to what can you do for me.”

This means the Yankees’ incentives worked, all right—they incented a consummate team player to quit the team.

The Yankees say they really wanted Torre back—which is either a lie or reveals the depths of their denial. Because if Levine, Steinbrenner et al really wanted him back, they would make him an offer that restored his pride. Yet—they’re too proud to do that.

So here’s the real irony. The thing that drives both their own behavior and Torre’s—pride—is something they don’t believe exists.

When you believe in a philosophy that is contradicted by your own behavior, that’s some serious denial.

If your company’s compensation people get the bright idea of incentivizing trust—“I know, let’s give them big rewards for behaving selflessly!”—send them to the Bronx. The Yankees’ front office is their kind of place.