Incentives

I  have just finished reading the well known book Freakonomics. An interesting read because of the subjects that are covered (did you know that your first name has a strong correlation to your economic well being?), even more so because of the unique way the authors look at things around us.

Personnaly I found the most relevant subject in the book is that of Chapter 1 called “What do schoolteachers and Sumo wrestlers have in common?”. What they have in common is they cheat faced with strong incentives. Incentive is defined in the book as “a means to urge people to more of a good thing or less of a bad thing”. The book categorizes three different motivators:

  1. Economic – you get paid more
  2. Social – because it makes you look better in front of others
  3. Moral – because it is the right thing to do

Organisations typically use financial incentives, it easy to do compared to creating an environment where moral and social incentives are present. A downside is that financial incentives often involve people doing things to maximize their pay and not maximize what you actually want. The classic example is that of a salesman offering so much rebate on the sales that he sells a lot, but at a loss. The second and for me a more hidden consequence of financial incentives is that they destroy any social and moral incentives that people already have and make it difficult at best to recreate them.

A lot of material (see Joel blog, Econ 101) has been written how destructive payment incentives are for a software engineering group. The only alternative is to create and sustain an environment where people feel in control and as a result feel responsible for what they are doing.

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