Opinion | Asymmetric incentives have the power to push for innovation
If you put the power of incentives and the irrational ways in which humans behave (predictably so), we can come up with a power recipe of motivating employees to experiment
If fostering an enduring culture is the most crucial job of a leader, there are three possible levers—talent, routines and incentives. The talent answers the “who” question, or the actors enacting the play; the routines addresses the “how” question, which is the very script of the play; while the incentives is the all-important “why”; why should the actor stick to the script or else improvise.
The extant literature on shaping organizational culture, or managing change, focuses on the talent and routines aspect of the triad, whereas the incentives, or the “what-if” question is not dealt with adequately. There is no merit in assembling the best team and offering the finest script unless the motive, or lack of it, isn’t well understood. It’s time to understand how time-tested mechanism of influential managers marshal scarce resources to deliver sustainable performance. The focus is on incentives, more specifically, asymmetric incentives.
An employee is typically involved in two kinds of activities—routines and experiments. Routines are less effortful, more predictable, and occupy a larger share of one’s time; whereas experiments are not only rare but rarely yield a desired outcome. Notwithstanding, most activities are routinized, and people seldom get time to plan for experiments, both in personal and professional worlds. For any cultural transformation, especially of innovation, the intent would be to preserve the routines, as well change those through experiments. Or as Jeff Bezos says: “If you double the number of experiments you do per year you’re going to double your inventiveness.”
As any behavioural psychologist would agree, more than the people or their jobs, it is the incentives (or lack of those) impacting their behaviours and performance. As Steven Levitt, the famous behavioural economist and author of Freakonomics, puts it : “An incentive is a bullet, a key: an often tiny object with astonishing power to change a situation.”
However, not all incentives work in the same manner. Human, the not so rational beings, behave in irrational ways to situations, as extensively studied and documented by Nobel laureate, Daniel Kahneman, in his research on prospect theory. Loss aversion, or the prospect theory, explains why a loss of $100 makes you sadder than the happiness you derive from getting the same $100. That’s an asymmetric behaviour, or put simply states that “losses loom larger than gains”.
If you put the power of incentives and the irrational ways in which humans behave (predictably so), we can come up with a power recipe of motivating employees to experiment. Here is how it works. For the routine, regular tasks, reward mildly for successful accomplishment, but punish severely when one fails on performing a routine task; whereas for experiments, which are inherently risky, reward handsomely for a successful outcome but reprimand only mildly for a failure. Why reprimand? Because you don’t want failure to be a habit and further let employees be wasteful in their efforts. It happens in sports all the time. A home run is not only risky, but also richly rewarding; and hence, an occasional home run amid the single is the approach most accomplished batsmen adopt.
Remember, today’s experiments are tomorrow’s routines, and hence, an organization must plan to plant experiments amid the stability that routines offer; and (asymmetric) incentives can be the real lever. And guess what—which of the two, routines or experiments, would first go the artificial intelligence way? I reckon, it would be routines. And hence, all the more reason to plant experiments. Or as Alan Key quipped, “The best way to predict the future is to invent it.”
Pavan Soni is the founder of Inflexion Point, an innovation and strategy consultancy.
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