You need to understand the power of incentive to understand different forms of relationships from business to romance. Human beings in general, are incentivized to work on something based on their incentives. For the most part, if you put sugar on the floor, people scramble like ants, forgetting the candy jar.
Charlie Munger talks about the power of incentives, and how he underestimates it year after year. He uses the case of Federal Express as an example (which is my personal favourite case study on incentives)
Federal express required packages to be shifted rapidly from one location to another each night. Federal Express had a difficult time trying to make it work. They tried moral suasion, everything under the sun and someone got the idea that instead of paying their workers by the hour, they paid them by shift work. If they got it done, they can go home.
Their problems cleared up overnight. That’s the power of incentive.
I’ve used the power of incentives as a means to an end during dire times. I used it to take on my superior during my national service days. I used it to negotiate a different set of working conditions in reservist. In business, I got threatened by legal action from a bully businessman. Instead of backing down, I used the power of incentives to force him to meet me in the middle.
For the most part, I only use my Machiavellian purposes when under threat. In general, I do not spend my mental energy playing petty politics. They are a time sink. However, as I mature, I realized it’s an inevitable aspect of daily life.
When You Count Too Much and Think Too Little
In organizations, the power of incentive must be understood.
I’ll use an example:
If you’re the CEO of a company and you hire an administrative assistant and you incentivized her through a singular key performance indicator: go through 20 pages of documents per day.
The majority of administrative assistants you hire are going to end up solely focus on going through that 20 pages a day. You’ll consider that a success right? No. Not really. In every organization, especially the new economy, your work is going to inevitably overlap to other areas of the organization.
Your administrative assistant wouldn’t be incentivized to improve other areas of the organization since she’s ONLY incentivized to meet that singular key performance metric. Not only that, she may be incentivized to sacrifice other areas of the organization in order to hit that one singular metric.
Let’s assume that she has other abilities such as re-organizing workflow or even removed the need to go through 20 pages of documents a day.
If you’re solely measuring her by that singular key performance metric, she’s NOT incentivized to introduce these changes. Not only that, but she’ll also be socially punished by sticking her head out. Her superior and colleagues may say: ‘why aren’t you sticking the original key performance indicator?’
Grades as an Example
Now, I’m going to revert to education. I’m going use school grades as an example because it’s a topic close to my heart.
When you’re solely judged by your ability to perform in examinations, you’re not incentivized to maximize your learning, but you’re incentivized to get good grades. There’s a stark difference.
It’s a common observation through the years. I used to think it’s limited to lesser Universities. However, this happens across the board, from normal Universities to ‘Ivy League’.
If you’re Singaporean, that is probably how you were brought up. It mattered more if you got good grades than to ask annoying questions in class. If you don’t perform in school, you get reprimanded. Let’s say you’re solely measured by grades, hence, you study your butt off and ignore other areas of your life such as emotional intelligence or kinesthetic intelligence.
Is that true success?
In the eyes of a sole, conventional metric, you’re a wild success. However, in the larger scheme of things, you might be a failure. You may have extremely good grades, however, you may be pursuing something that isn’t aligned to your personal values. You may be good at memory work, however, you may be poor at coming up with original arguments. The list can go on.
Unlike all the other B.S. life coaches, I’m here to tell you the truth. You need to encompass a multi-disciplined approach to solving problems and life at large.
Should You Disregard Metrics Then?
Look, I’m not saying to completely disregard your KPIs. They are important. I’m saying that a lot of them are arbitrary and debatable. I’m also saying: focus on the RIGHT KPIs and the RIGHT incentives. The solution is to set up KPIs and incentives that take into account your overall life and organization as a whole.
As human beings, all of us are wired to behave in a manner to maximize our own gains. If you want the people in your organization to produce optimal results, you need to learn how to incentivize them in a way that maximizes their own personal gains by setting the right incentives, and the right metrics.
That’s the power of incentives.