Gaming the Incentives

game-theory-paper-matrix-final1Humans are fantastic at finding holes in incentive systems. Give incentives to retail employees to push an add-on product – and they’ll find a way to do so without increasing your bottom line profits. Incentivize efficient behavior for testers – finding bugs! – and they’ll open millions of stupid, mindless little defects that waste your time.

Joel Spolsky says it best:

I’m always on the lookout for these incentive schemes gone wrong. There’s a great book on the subject by Harvard Business School professor Robert Austin — Measuring and Managing Performance in Organizations. The book’s central thesis is fairly simple: When you try to measure people’s performance, you have to take into account how they are going to react. Inevitably, people will figure out how to get the number you want at the expense of what you are not measuring, including things you can’t measure, such as morale and customer goodwill.

This has far-reaching implications into motivating employees that are far from commission-based. Let’s take two simple premises that many large companies follow:

  1. Reward employees on a curve (ex. 20% great, 60% average, 20% under-performing). Force that curve at every level of the organization to make sure that no manager can claim that his team is “all stars” and thus pull the blanket of rewards to her group.
  2. Tie financial rewards for an employee are to their individual success only – that is, their relative performance compared to their peers, as viewed by a panel of superiors. The logic goes, if you tie employee rewards to product success, you won’t have stars joining struggling teams as they don’t want to be weighed down by failure.

Let’s think about what you get in the end from this explosive combination from a purely logical, reasonable employee. They observe that their own upside is completely disconnected from the success of their product. As a result, two kinds of behaviors start:

  1. Backstabbing and political play. This one is kind of obvious and everyone talks about it: if I’m rewarded based upon subjective opinions of my superiors, I better kiss up to the superiors and make my peers look bad.
  2. Poor hiring. Who are the people doing the interviewing for new talent in your organization? The same people that you apply the incentives to. “If I hire mediocre people onto my team,” the thinking goes, “I will be a shining star at the next performance review!” Therefore, I’ll give a Hire to an intentionally bad candidate! This will ensure my continuous success in the organization, while decreasing the chances of the group as a whole to succeed.

OK, you’re in shock. You’re about to say that:

  • I have to work with these mediocre people that I just brought into my group. Yeah, so what? I can hire really nice and really unproductive co-workers. I’ve seen plenty in my career.
  • If everyone does it, the company will go under and there won’t be any cash wins for anyone! Yeah, except that when I see others doing it, I don’t want to be the one left out.
  • This is plain immoral and intentionally malicious to the organization! Nobody would do this!

Do not ever place people in a situation where rational, logical behavior conflicts with their morals. Your counterpart will either suffer moral trauma (my wife really wanted to go to Hawaii, and there I am, not doing all it takes…) or do the thing that’s wrong for the business.

Here’s an intuitive way to approach this: if your friend lent you a MILLION dollars in cash tomorrow, with no contract or witnesses, with no trace of the transaction, would you be tempted to cheat them and pretend they never gave you the money? How about a BILLION dollars? An amount that will be enough to take care of EVERYONE you love and their grand-children, for the rest of their lives?..

Stop lying to yourself. There is a price for everything. People are rational beings, and they place value on things that are difficult to measure. You probably wouldn’t screw a friend for a thousand dollars, right? But for a BILLION? You would. Everyone would. Don’t put your friends in a position where their morals conflict with what’s good for them in terms of utility. And don’t ever do this to business associates, because I guarantee you – their loyalty to your business is lower than your loyalty to your friends.

Good fences make good neighbors. Good contracts make for fabulous partnerships.

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6 thoughts on “Gaming the Incentives

  1. Dave says:

    I think you’re oversimplifying when you say “Stop lying to yourself. There is a price for everything…” Don’t make the mistake of correlating happiness with money. If you don’t have enough money, you are likely to be unhappy. If you do, you’ll be as unhappy about something else. Greed only gets you that far and you know what? I think most people are actually not that greedy. What am I going to do with a gajillion dollars? Make all of my friends and relatives super-happy? Very unlikely, indeed. You know that there are lots of sad stories about lottery winners – do you think it’s just the profit that makes a multi-millionaire tick?

    There was a very nice video floating around facebook a while ago (maybe you even posted it yourself) showing that for intellectual work, monetary incentives plainly did not work. You only needed to pay what was considered fair to the worker – and then motivation outperformed monetary bonuses.

    • I’m not suggesting that money makes you happy. There’s plenty of research that suggests otherwise – that there’s no correlation past a certain income point. The truth here doesn’t matter. What matters is PERCEPTION of possible utility: are you seriously suggesting that most people you know wouldn’t do something immoral for a billion dollars? Really?..

      I wholeheartedly agree that using money as a motivator is a VERY bad idea. But, tempting your employees with illusory, immoral ways to cheat the system is even worse – it brings them zero happiness, it destroys your business, and makes all participants feel cheated. Use ground rules that prevent abuse – don’t place people around you in a position where they have to choose between morality and perception of personal utility.

      • Dave says:

        As for “a billion dollars for something immoral” – sure. But this is a three-dimensional space consisting of X = Amount, Y = How Immoral the action is, Z = Individual’s tolerance for doing immoral things.

        For example, would you torture a cat for $10M? What about $10G? How about killing someone for the same amount of cash? I am sure there are singluarities in this space – many people won’t do many things no matter how much you pay them. And then some folks would do horrible things for $10.

        Having said that, giving people two options of achieving a result – honestly and via cheating exercises the notion of the “path of the least resistance”. The sales reps in the Spolsky’s example (God I dislike this guy!) don’t feel too bad about themselves – they’ve outsmarted the system while playing by the rules. So I guess your point is – avoid schemes that encourage people to do bad things 🙂

  2. Bobino says:

    I think you are thinking of a problem of large corporations. In a smaller organization, this would be much more difficult. In a smaller environment, everybody knows everybody, and a poor performer would have a hard time convincing people that they should be on the payroll.

    I was once working on a company of 200 employees (exactly 200) and the reason it was exactly 200 was that the owner believed that he should personally know everyone. By that logic, he was the gatekeeper of quality, and would himself sort people out. If your project was under and a person was continuously underperforming, it was easier to make a case to get rid of that person, than to make a case to add an extra person.

    This 200 people constraint was extremely beneficial for the organization. But it limited people’s growth (i.e. you can never become a supervisor, unless a supervisor decides to leave). So, at the end of the day, there was a large turnaround of lower-level employees who wanted growth, and a large population of people who were extremely skilled technically (i.e. the people who don’t want to be supervisors ever).

    To come back to Alex’s point. I think he’s right on the money, people will always optimize for what they can, IF they can. If the structure prohibits the game, you will subclass your people based on the restrictions.

    • You’re hitting upon a great point. Startups, by definition, do not have issues like this. If you’re in a startup, you’re severely underpaid, and the only chance to get compensated adequately is to have your company be successful – so that it’s sold or goes public.

      As such, every employee is logically forced to optimize not for themselves – but for the entire company, because that’s when their stock options become worth something. Backstabbing and poor hiring might improve their compensation – by a few percent – but making the organization has a WAY higher expected value for personal returns.

      Game theory all the way. Now, how do you apply lessons like these to a large corporation, without introducing an intermediary quantifiable measure that people will try to cheat? Is it even possible?

  3. I have something new to add. I’ve just heard of a story where an accountant of a good friend of mine has been systematically embezzling. The tracking system that the owner has put in place has been inadequate, it had holes that allowed the accountant to hide his crime for many months. Note that the accountant has been employed by the company for 2+ years – and only in the past 6 months did he do bad stuff.

    Why did he do it? I’ve actually met the guy and I guarantee you, you wouldn’t think of him as a criminal. I think he did it because he could get away with it. He did it because the temptation of stealing with no trace was just too high. In effect, I believe that he did it because he was very certain that he would not be caught.

    Yes, you’re about to tell me that people who rob banks all do it because they think they won’t be caught. That’s exactly my point: DEMONSTRATE, loudly and obnoxiously, how serious your security systems are, how you follow the law to the dot, and you will remove most of the temptations. If you run a bank – put cameras on every corner of your building, in the bathrooms, under the desks, into employee’s clothes. I don’t care that nobody is reviewing the video streams. It’s the demonstration of strength that shuts of the thoughts of cheating.

    They say that door locks are meant to protect against the good people; every bank, no matter how fortified, will get robbed once in a while. That said, you can really affect your chances by placing people in the position where they don’t have to make that difficult choice between morality and personal gain.

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