When Incentives Backfire

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.