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Why Incentives Don’t Work

April 12, 2018 - By Steve Levitt, a renowned American economist who co-authored the best-selling book Freakonomics and is currently the William B Ogden Distinguished Service Professor of Economics at the University of Chicago and director of the Becker Center on Chicago Price Theory at the University of Chicago Booth School of Business..

COMMENT BY WENDY LAMBOURNE, LEGITIMATE LEADERSHIP, ON THIS VIDEO

We totally agree with Steve Levitt’s view about incentives. There are two problems with incentives. First, they get movement but not willingness. Second, because the intent behind incentives is to “give to get”, they incite a haggle. In 35 years I have never come across an incentive scheme that does not lead to conflict.

Rather than incentivising employees, leaders should focus on three things:

  1. Provide their people with a purpose worth committing to; help employees to feel that they have been given an opportunity to be part of something eminently worthwhile.
  2. Enable their people to make a contribution and realise the best in themselves by caring for and growing them.
  3. Inspire a love in their people for the work that they do – just as master craftsmen not only teach their apprentices a trade but imbue in them a love of it.

OUR SUMMARY OF THIS VIDEO: Levitt was asked at an event: “Most organizations have incentive schemes which are a mixture of carrot and stick and then spend lots of time trying to make the rules of the game and then watching people trying to find the loophole and break the rules. What’s your work done on that and how would you shape incentive schemes to be productive?”

His answer: “Economists don’t have that much to say on the carrot and stick. You can’t use a very big stick because slavery is outlawed so your people can leave if you use too much of the stick. So you are forced in business to use a lot of carrot. But I think financial incentives are far overrated in business. The problem with financial incentives is that almost immediately people acclimatise to them.

“Let me give you a trivial example. My wife ran the human resources at a dog food manufacturer in Boston and we had a bunch of immigrant workers there – Brazilian immigrants, very poor people who made very low wages. So as a perk she organized that all of them got a turkey for Christmas.

“The first year, they were just elated – they were so happy, it was so nice the employer had done something for them, given them this nice turkey, and morale was very high.

“The next year they gave a turkey again. This time nothing really happened – within a year these workers had decided that it was their God-given right that every year they should be given a turkey by the employer.

“The third year they were furious. They complained that the turkeys that year were not as big as the turkeys last year – that ‘it is terrible what you’ve done to us, cheating us on our turkeys’.

“I think that’s true of almost every sort of financial perk you can give: as soon as you give it once, people just expect it in the future.

“I think the real answer, and this is not easy and it is going to sound weird, is to cajole or to trick your employees into thinking that what they’re doing is important. That is far more effective in the long run than giving them money. People who love what they do and think what they’re doing makes a difference are much better employees.

“For example, I spent a lot of time at Google, which is more cult-like than any organization I’ve ever been in. People who work at Google, love Google – they believe in Google, they think Google is incredibly important.

“My first introduction to Google was when I approached them because I thought that we could use Google’s data to try to stave off the next global disease pandemic. My idea was that the official government bureaucracies that track disease are way behind – it takes them forever to get information. But, for instance, in rural parts of China you could imagine a clinic typing into Google about some strange rash, or something like smallpox, and gathering information to see whether or not a global pandemic was starting.

“I talked to people at Google about doing it and I think they had some confidence it would work. But they said they would not do it. I asked why and they said because the privacy of their users was more important. I said I don’t care about any individual’s name; I just want to see who is typing in that they have a high fever. The (Google) guy said to me that there are teenagers all over the world who, the first thing when they wake up in the morning, think, ‘Google is going to keep my data safe’ – and that is more important to Google than preventing the next global pandemic. (I think that is probably false on both counts: first I’m not sure there any teenagers in the world who, the first thing they think when they wake up is that it is most important to them that Google keeps their data safe; and second I’m not sure that that is better than staving off a world pandemic)

“But the point is that the people who work at Google, love Google. For instance, Google gives them 20% of their time – one day a week – to do whatever they want just because they have confidence that these people, who love their company, are going to generate value by following ideas.

“So I think ultimately if there’s one thing I would do as a manager it would be to try and inculcate into the people who work for me why what they’re doing is important, why it matters. And when stuff matters then you don’t care nearly as much about exactly what your wages are relative to the next person.

“That is my advice about incentives.”

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