Show me the incentives and I'll show you the results.
It's my favorite Munger quote, and it's a really good one. So often businesses invest so much time, effort, and money into everything but incentives. No matter how much you spend on culture, perks, diversity, swag etc, if the incentives are not aligned to some over-arching goal internally, you will not get the results you're looking for.
Let me ground this in a concrete example. If your KPI is a certain number of calls per day from a sales person, here's how the most Machiavellian caller will hit it:
1. Spend little time with good prospects (they're paid by call, not by conversion!)
2. Call old numbers/disconnected/rapid disconnects
3. Call multiple numbers at once, reduce call quality
etc.
For any other metric you pick (conversion rate, call time, etc) there are similar schemes that have undesirable side effects. Either you very carefully build a composite framework of incentives to use, or you take the index fund approach and compensate on overall company performance (like a stock bonus, profit bonuses, etc). Personally, I think the best option is stock bonuses, but you may disagree.
Either way, getting those incentives right is absolutely key to performance.
Sure, but it has plenty of other desirable outcomes (some of which are more for your employer than you):
1. There is a risk that the stock loses value but stocks generally have positive EV.
2. Since stocks vest over time there is some intrinsic value in being able to simply walk away if the stock crashes (dropping your comp going forward) but being able to stay if the stock surged (greatly increasing your comp compared to your market rate). It’s kind of like having a long-dated option.
3. It generally takes months to a couple years for stocks to change in value enough for it to put you over market rate. It takes similar amounts of time for you to fully ramp up and start adding value to the company. Generally you tend to get into golden handcuff range right around the time you start settling in. Getting paid above-market in a role where you’re doing well is great.
4. You may not have enough influence to really move the stock up but you often do have enough influence to move it down (like being sloppy or doing something destructive like leaking).
5. From the employer perspective, aligning your financial interests with the board/founders/investors/execs probably means you’re unlikely to try to unionize or get angry at the company when it gives you only a 5% salary bump in a year where the stock increased 100%. Generally speaking the worker:exec relationship is less combative since there’s less of a conflict of interests. As an employee there are nice aspects of this, like the whole company having a more collegiate or team-like atmosphere.
Correct, certainly not perfect. I actually view 1,2 as features, and 3 as preferable to some of the active harm that comes with other incentives. You could reject that and optimize on something else.
The goal is really to understand the impacts of whatever incentives you choose. I don't think there is a side-effect free incentive.
It's my favorite Munger quote, and it's a really good one. So often businesses invest so much time, effort, and money into everything but incentives. No matter how much you spend on culture, perks, diversity, swag etc, if the incentives are not aligned to some over-arching goal internally, you will not get the results you're looking for.
Let me ground this in a concrete example. If your KPI is a certain number of calls per day from a sales person, here's how the most Machiavellian caller will hit it:
1. Spend little time with good prospects (they're paid by call, not by conversion!)
2. Call old numbers/disconnected/rapid disconnects
3. Call multiple numbers at once, reduce call quality etc.
For any other metric you pick (conversion rate, call time, etc) there are similar schemes that have undesirable side effects. Either you very carefully build a composite framework of incentives to use, or you take the index fund approach and compensate on overall company performance (like a stock bonus, profit bonuses, etc). Personally, I think the best option is stock bonuses, but you may disagree.
Either way, getting those incentives right is absolutely key to performance.