Category: Strategy

Many believe that if you create the right system of incentives people will perform better at what they are needed to do.

For example, with sales people you just need to get the commissions and bonuses right and that will result in people meeting and exceeding targets.

But is this really the case?

An increasing amount of research (and a helping of common sense) suggests that it isn’t.

Linking a reward directly to behaviour has an unwelcome side effect – it tends to reduce how much you want to do it.

Ideally, you want behaviour to be intrinsically motivated: people do a good job because they want to, children eat greens because they want to, people turn off the lights when the leave a room because they want to.

In their book Intrinsic Motivation and Self-Determination in Human Behavior the authors, Edward Deci and Richard Ryan, write that “the research has consistently shown that any contingent payment system tends to undermine intrinsic motivation.”

Such payments can have a corrosive impact on organisational performance, especially when you are asking people to do complicated or interesting things.

People quickly learn just how much they need to do to get the payments, and no more.

Or they “game” the system – by making decisions that protect their own payments while ignoring the decisions that may provide a greater overall benefit.

It turns out that there are at least two things you can experiment with to break this cycle.

First, make rewards a surprise. If you can’t predict when you will be rewarded, you don’t link the reward to what you do, and that has less of an impact on your behaviour.

Second, it turns out that people are more motivated when given a choice between a bad task and a worse one.

Try this on your kids: see how much longer they do their homework when given an choice to do that, or clean the dishes versus being able to watch TV when they are done.

The silver bullet, however, is to aim for incentive systems that design in goal congruence.

Goal congruence simply means that individual goals are consistent with, or agree with the larger organisational goals.

It requires looking at more than just the person and their role but also consider how what they do interacts with and influences the larger organisational system.

This is easy to say, but not that easy to do.

But that is also why organisations that can pull this off should be able to show real improvements in organisational productivity and behaviour.

There appear to be no shortcuts to becoming competent at something.

All skills, rather inconveniently, seem to take time and effort to master.

Why is it then that some people believe that they are outstanding performers at an activity when it is clear to others that they are not based on their performance?

This appears to be because of a cognitive bias called the Dunning-Kruger effect, shown in the chart above.

When you are starting an activity, you may not be fully aware of what it means to be good at that activity.

As a result, you may be excessively confident of your ability and performance.

As you spend more time doing the activity and undergoing training, you become better at identifying what it means to be good.

As a result, your confidence in your ability to do the activity might also fall.

This can carry on until you reach a point where you can see that you are now doing better at the activity each time, and your confidence once again grows.

Once you are competent, perhaps even an expert, your confidence in being able to carry out the activity is now justified and is apparent to others through your results.

In essence, the way to avoid being trapped by the Dunning-Kruger effect is to become more self aware.

In her book Madness, Rack and Honey, the author Mary Ruefle writes about a remark made by the Vietnamese monk Thich Nhat Hanh on self awareness: “Before I began to practice, mountains were mountains and rivers were rivers. After I began to practice, mountains were no longer mountains and rivers were no longer rivers. Now, I have practiced for some time, and mountains are again mountains and rivers are again rivers.”

Or, as Confucius said succinctly: “Real knowledge is to know the extent of one’s ignorance.”

For a long time people were thought of as “resources”, lumped together in a generic mass of labour that had an economic purpose.

Many organisations still think of people in this way – and it’s in the title they give the department that deals with this task – Human Resources.

Is this the right term to describe this activity now?

The Economist has an interesting article on Gary Becker, the Nobel prize winning economist, who in the 1950s began to articulate a theory of economics based on “human capital” – investments in things that raise your own value.

Becker explains that a form of capital like a physical asset is something that yields income and other useful benefits over time.

Less tangible investments such as education, health or habits can also yield income and other useful benefits – and this is what economists refer to as human capital.

The most important ways to create human capital are through investing in education, training and health.

Human capital is something that an organisation cannot separate from you.

You can’t be forced to give up your knowledge, skills or health in the same way that your house, car or bank savings can be taken from you.

This creates a quandry for organisations such as banks or employers.

A bank may be happy to lend you money for a house, knowing that they can always get the house if you fail to make repayments, but they may be less happy to lend you money for an education.

Employers may be happy to invest in job-related training that makes you more productive on their equipment or technology but less willing to invest in generic education that makes you more marketable.

This is why many investments in human capital have to be funded by people themselves, rather than relying on others to fund it for them.

One form of investment is “opportunity cost”, the earnings forgone by someone who goes on to complete advanced education. Many others rely on savings for later education.

It is also important to value the total returns from human capital accurately.

One form of return is income – more money – which seems all important because it is so visible.

But you also have other useful benefits – more interesting work, more choice, perhaps more opportunities, that arise as a consequence of increasing your human capital.

You need to take into account all these potential returns as you decide where and when to invest in yourself.

There’s a lizard inside your brain.

This is the part of your brain that tries to keep you alive, and it does this by being aware of what is happening around you.

Your brain has a strong “novelty” bias. If something new turns up, you stop and figure out what this new thing means for you – is it dangerous or not?

And, because it’s such an important (or used to be important in the days when sabre-tooth tigers were around) brain function to have, it can cut through everything else you are doing to get your attention.

In other words, you can be easily distracted by something new in your environment.

And the tools we use for work and life now are designed to distract us, and as individuals and organisations, we should think hard about whether that is something we should allow.

Daniel Levitin describes how multi-tasking is bad for you in his book The organized mind.

Take email, for example. You can’t predict when the next email will come into your inbox.

When it does, you get anything from a little icon in the bottom right corner of your screen to a big ding sound if your speakers are on.

It is simply impossible for your brain not to notice that something has changed in the environment in front of you.

Your brain responds chemically, burning up brain fuel (oxygenated glucose), increasing the stress hormone cortisol and gets your body ready to fight or flee.

When this happens hundreds of times a day, it make you much less productive. Just knowing that you have an unread email in your inbox drops your IQ by 10 points.

It turns out that multi-tasking is worse for you than smoking pot.

One reason why email (and facebook and every other social communication tool) is exploding is that the marginal costs of sending a message are so low.

It costs someone nothing to send a new message.

As a result, everyone sends more of them – something they wouldn’t do if they had a limit on the number they could send, or paid a price when they sent each one.

So what we do if we want to be more productive?

There are two things to try out.

First try and limit your exposure to novelty. If you need to work on something and concentrate, turn off email and your phone for a while.

It’s hard, but you’ll get more done more quickly without interruptions and your brain will be happier at the end of that time.

Second, work in time-blocks. This simply means having set times when you work and a set time when you check email and communicate.

This is what Paul Graham of YCombinator calls Maker’s Schedule, Manager’s Schedule.

In most organisations, a recurring complaint from workers is the volume of email that comes in every day.

If you are in a position of influence to make your organisation more productive, perhaps the best way is to make it OK for people to check email once or twice a day rather than having it on all the time.

Four.

Because calling a tail a leg doesn’t make it one.

This riddle has been around for a few centuries and is often attributed to Lincoln, but actually goes back further.

It’s a useful thought to keep in mind, especially when you consider that governments often find it easier to redefine reality rather than do something about it.

At the same time, existing definitions may come under fire because they describe something as reality that people no longer think is the case.

An example is the definition of marriage.

You have a religious definition that is based on a relationship between a man and a woman.

And then you have a secular definition that is based on a relationship between two people.

Depending on how you have reached your own opinion on the matter, you may disagree with others as to which one should accurately represent reality.

In 2015, the government decided to redefine child poverty as based more around a lack of family morals rather than a lack of cash.

Campaigners for poverty reduction disagree.

In this TED talk by Rutger Bregman, he talks about how Margaret Thatcher called poverty a “personality defect”.

Bregman argues that if everyone had a basic income guarantee you would eradicate poverty and it would be much cheaper than all the programmes that try to remove it through education and helping the poor to help themselves.

The energy industry has suffered from this too.

In the period from 2006 – 2008, there was an effort by the government to redefine everything in terms of carbon rather than energy.

The focus became how to reduce carbon, rather than how to reduce energy.

When we look back at this period, it is possible that we will see that this has led to distortions in the market, and that change in definition has led to reducing efforts to invest in energy efficiency while increasing efforts to invest in green generation.

This means we use the same amount of energy – but use less carbon.

Not that making cleaner energy isn’t good for the planet.

It’s just that not using it at all in the first place is even better.