What Are You Incenting?

When I was first introduced to economics, I found that I enjoyed the history of economic thought – the great writers such as Adam Smith, John Stuart Mill, Keynes, Galbraith, etc.  But then my econ classes turned more toward math and graphs. I eventually lost my original enthusiasm for the field but gained some appreciation for why it can be referred to as “the dismal science”.

Economics has once again become interesting to me as a number of excellent books have been published that approach economics from the standpoint of psychology and incentives. The study of incentives has always been key to economic thought – that isn’t anything new. However, it feels to me that there has been a lot of fresh writing in this area – examples include everything from Malcolm Gladwell to Daniel Kahneman to the Freakonomics books, Dan Ariely’s writings, and others. Truly, whatever behavior you subsidize or incent you will get more of.

Since I’m confounded by the morass of the American healthcare system and what passes for “debate” on this issue in Washington, I have a tendency to pick up books that help me understand different points of view on the problem. Books that fit this category include Catastrophic Care by David Goldhill and America’s Bitter Pill by Steven Brill (for the essay that launched Brill’s book, go here).

I just finished An American Sickness by Dr Elisabeth Rosenthal, a new and powerful book that I highly recommend. Keep in mind that I’m not recommending it because it’s always fun to read. Since Dr. Rosenthal relates a number of stories about people being caught in a web of overcharges and diminishing competition, it reads more like a horror novel than some of the Stephen King books I’ve read. I almost had to sleep with the light on.

Since this is a blog about leadership, innovation and personal effectiveness, I’ll leave the healthcare debate aside. However, this one section caught my attention:

“Cataracts can be detected during an eye exam long before they become a real bother to patients, so there is much discretion about when to perform surgery. Studies have shown that the rates of cataract surgery are highly dependent on how much doctors are paid to do the procedure. In one study in St. Louis, the number of cataract surgeries performed dropped 45 percent six months after a group of doctors went on salary and were no longer paid per surgery.”

I don’t know about you, but I find that to be a bit alarming. It’s a pretty good indicator that doctors who are incented to do cataract surgeries will do borderline cases to pump up their income.  And this got me to thinking about incentives in general.

In the early days of the enterprise software industry, the need to “GBF” (Get Big Fast) for an “IPO” (Initial Public Offering) caused companies to do idiotic deals (“if you agree to increase your order by $20K we’ll give you unlimited transactions for three years!”).

These deals were often struck in the last 72 hours of a quarter – a fact that was not lost on the buyers, thus effectively freezing commerce for 88 days each quarter while everyone waited for the discount frenzy in the last few days. I’m not sure how I avoided developing ulcers during all of this.

The new SaaS (Software as a Service) model, also known by the term “Cloud”, helps break some of these incentives, and the buyers and sellers are better for it.

So what are you really incenting in your company?

• Are you doing dumb deals to make the quarter?
• Are you incenting your employees to be short-term, transactionally focused employees by giving them highly-leveraged, short-term, transactionally focused compensation plans?
• What behaviors do you celebrate in the office?

For more reading on behavioral “nudges” and incentives, go here and here.

The power to change behaviors and markets are tied to the ability to recognize incentives. Recognizing incentives often requires that we follow the money and the reason for our celebrations. Whatever behavior you subsidize or incent, you will get more of.

So what are the behaviors you’d like to see from your team?

Good luck!

P.S. I had some Twitter haiku fun with another reader and the author this past weekend. We were formulating haikus based upon material from the book (don’t judge me).  Here was mine:

Doctors on salary
Cut cataract surgeries
Forty-five percent