In order to increase productivity, many companies reward their employees with monetary incentives. However, the results are often contrary to their expectations.
1937. Java Island, Indonesia. A team of paleontologists led by Ralph von Koenigswald discovers a hominid subspecies, known as Solo Man. In order to gather the largest possible number of skulls, von Koenigswald offers locals a reward of 10 cents for every piece of hominid bone they find. Later, von Koenigswald discovers to his horror that, to maximize their income, locals had smashed large pieces of bones into small ones.
1990. USA. Sears Auto Centers are the less profitable unit of the group. Consequently, Sears introduces a productivity-enhancing program which includes, among other things, an incentive based on a system of quotas and commissions for the sale of additional repairs. In 1992, the California Department of Consumer Affairs’ Bureau of Auto Repair releases a report that concludes that the auto centers usually overcharged for repairs, recommended unnecessary repairs and charged for repairs that hadn’t been done.
These are just two examples of a much broader phenomenon known as “perverse incentive”, i.e., an incentive that has an unintended and undesirable result. The reason why some incentives have perverse consequences generates controversy. Let’s see the four main theories:
Theory 1. Unattainable goals
According to Daniel Markovitz in an article in his HBR blog entitled “The Folly of Stretch Goals“, the cause of the unethical behavior of the employees of Sears were the overwhelming and unattainable goals which left workers no other choice but to defeat.
Theory 2. Rewarding ethical behavior
According to Carol Vallone, Patricia M. Schaeffer and Katherine A. Nelson in an article entitled “Rewarding Ethical Behavior“, to counteract the unethical behavior of employees (which, it seems, is inevitable), companies should incorporate ethics programs in their companies (as workers sometimes do not know “the rules “) and reward ethical behavior.
Theory 3. Intrinsic motivation vs. extrinsic motivation
Daniel H. Pink, in his book “Drive. The Surprising Truth About What Motivates Us” states that extrinsic motivations (as money) blind the breadth of thought and limit the wider dimensions of the behavior of people. Ultimately, extrinsic motivations lead people to choose the shortest path.
Theory 4. Economic rewards and selfishness
Yochai Benkler in his book “The Penguin and the Leviathan”, considers that by rewarding workers with money we are framing the company-employee relationship on a purely economic framework that leads workers to seek only their own profit.
All these reasons influenced, to a greater or lesser extent, in both cases we have discussed earlier in this article, but in my opinion, none of them identifies the main reason why the phenomenon of perverse incentives occurs.
The explanation I propose here is this: There is no unintended result. The incentives achieved just what they intended to achieve.
Both Sears and von Koenigswald got just what they asked for. Von Koenigswald wanted many fragments of bone and that is what the locals gave him. Sears wanted to increase the additional repairs and that’s what mechanics gave them.
When a company rewards sales representatives for each new customer they got, don’t be surprised if these new customers will soon leave or do not buy products again. The sales reps have done what they have been asked for. They get a large number of customers. No matter if the product offered was the best suited to the client, no matter if the client was insolvent. The company was not interested in that.
There is therefore no “perverse” incentive but a narrow goal that gives quantity priority over quality. Improving products and being honest with the customer are objectives that would have a further sustainable long-term performance.
Perhaps things would have been better if von Koenigswald had rewarded the native helpers according to the good condition and size of the bones. Surely, Sears should have considered the possibility of improving the service, instead of shifting the pressure on workers. Sears mechanics should have been rewarded by the degree of customer satisfaction and the quality of their repairs.
To know a little more about Theory 3 and 4, I recommend you to see the next videos:
Drive: The surprising truth about what motivates us (adapted from Dan Pink’s talk at the RSA)
The Penguin and The Leviathan: The Science and Practice of Cooperation (Yochai Benkler, Harvard University)