Doing incentives right

I joined a group of my friends in a 90 day body fat challenge starting this January 1st.  We each pay $100 into the pot, and there are monthly winners and the overall 90 day winner takes the bulk of the money.  We're two weeks in and I'm pretty impressed with the group average being 3% weight loss, and 13% body fat loss (that's percentage of a percentage, so 22% body fat down to 20% body fat).

We'll see how it goes, but I am fascinated by this graph.  It's the Google Trend graph of "fitness" with a two week spike coming each January as people make their New Years resolutions.  If that's any predictor, then most of the people in my contest should start dropping out over the next couple weeks.  I suspect, however, that the money component people paid in should change the outcome significantly, as I suspect people will be motivated to try harder.  Further, I think the weekly public spreadsheet we're keeping of everyone's progress will also better motivate people.

It's about setting the incentives properly.  Behavioral economists have long said that if you design the incentives properly, you can get people to do anything.  I even think the incentives in our contest are poorly designed.  I expect in a few weeks a small group of people will be way out in front, leaving the rest of the pack with little to no chance to catch them.  People will then see their money in as a sunk cost, and essentially drop out of the contest.  I proposed that instead of an entry fee and prize, that we go to a tax model.  For each person, if they lose 20% of their body fat, then they pay nothing.  If they lose 15%, then they pay $25, 10% pays $50, 5% pays $75 and 0% pays $100.  That way, even if you were losing late in the game, you still have an incentive to continue dieting and exercising.

Incentive design is a tremendous problem in the workplace.  I'll run through just a couple examples that are fairly well known:

Empire Building
In reviewing promotions within the management ranks, one of the first things that is reviewed is the size of a manager's organization.  HR will regularly say that org size isn't an important criteria in getting promoted, but the truth of the matter is that it is a very quick gut check on how much span of responsibility a person can handle.  Someone who is succeeding with a 200 person team can likely handle more span of responsibility than someone who is succeeding with a 20 person team.  However, as soon as this gets recognized within the ranks of an organization, you can count on the following behaviors:

• Turf wars as people compete to keep all parts of their organization, regardless if they make sense or not.
• Low performing orgs.  This isn't as obvious as managing out low performers typically results in the manager getting a backfill to upgrade.  But if you have high performers, you need fewer of them to do the same work, so perversely, you're incenting low performing orgs.
• Refusal to do anything new without additional headcount.  New projects are typically the only time when new heads are given to teams, so teams routinely cost out a new project, but say that they can't get it done within their own team.

I've seen all these and more.

Management by metrics

Many management guru's have preached the value of metrics with one liners like "Inspect what you Expect!"  I couldn't agree more with the practice as metrics focus you on the areas you really care about, and give you a yardstick by which to measure your progress.  The problem with most metrics is that they are imperfect and can be gamed.  In the early days at Yahoo, one of the most important metrics we reported to wall street was page views.  Gaming this metric is trivial because you can design a flow that has extra steps in it.  Logging into mail takes 4 clicks to get to your inbox instead of 3.  This metric improvement comes at the expense of your user, but if this is the system you set up to reward (either directly, or what wall street sets up), then you can bet the incentives are in place to drive this behavior.  This line of reasoning makes me very suspicious about the current search share war that the press is focused on with Bing and Google.  In search, doing fewer searches is usually indicative of a better product (you found what you were looking for).  Too much focus on metrics can eventually doom them.

Sales targets

Sales people are usually given a quota and given a bonus based on how well they do on a quarterly basis at achieving that quota.  Typically they have a target bonus for hitting 100% of their quota, and then a scale for missing or going over.  Sell 50% of quota, get 0% bonus.  75% of quota, get 50% bonus.  150% of quota, get 300% of bonus, etc.  Since the top and bottom of the incentives are usually capped at 50% and 150%, this can lead to incenting tom strange behavior.  If a salesperson is having a great quarter and has already hit the 150%, then they have no incentive to sell more this quarter, and instead have an incentive to delay sales to next quarter.  Or if a sales person has sold 95% of their quota, they may call their accounts to get them to move next quarter's order into this quarter to get to the 100% bonus.  Or if they're selling terribly, they may decide to take a bath on this quarter and come in below 50% and delay all pending sales to next quarter.

The key lesson to take away from here is that the incentives you set up for your employees are what they will work towards.  Even if they're trustworthy and high integrity people, there have been many many studies showing people will always shade towards their own self interest when incented to do so.  So be very careful designing your incentives.  Going back to the body fat loss challenge, the biggest concern I have is that it's on the honor system, and measuring body fat is an inexact science.  The method we're using is based on measuring your girth in several places.  I suspect that come March, those tape measures start squeezing bellies in a bit more than they did on Jan 1st.

That said, if the $100 I paid continues to motivate me as much as it has for the past two weeks, then it will have been money well spent.