Incentives
Whats In It For Me?
Understanding Incentives Is The Key To Understanding People
Incentives - Overview
Incentives can be simply defined as anything that motivates or encourages someone to do something.
Warren Buffett's long term business partner Charlie Munger is of the view that there are few forces more powerful:
"Well, I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther."
Aligning incentives with goals
He give the example of Federal Express as one of his favourite examples of the power of incentives and ensuring that they were aligned with the business goals:
"The heart and soul of the integrity of the system is that all the packages have to be shifted rapidly in one central location each night. And the system has no integrity if the whole shift can’t be done fast.
And Federal Express had one hell of a time getting the thing
to work.
And they tried moral persuasion, they tried everything in the world, and
finally somebody got the happy thought that they were paying the night
shift by the hour, and that maybe if they paid them by the shift, the
system would work better. And lo and behold, that solution worked."
If you want to know why something keeps recurring look at the incentives
Some years ago I researched and published an article: Merger failures, value destruction and cultural conflicts in which I looked at the research evidence on what so many mergers failto achieve the intended "synergies". For those not familiar with the concept, technically speaking, "synergy" is defined as the increase in the merging firms’ competitive strengths and resulting cash flows beyond which the two companies are expected to accomplish independently.
The overwhelming factor in the high rate of merger failures and value destruction was people related issues.
I noted that a study of 40 British companies, reported that all 40 conducted a detailed financial and legal audit of the company they intended to acquire, but that not even one of these same companies made any attempt to carry out an audit of the company’s human resources and culture to assess the challenges concerning integration of the organization they were acquiring.
Given that companies engaging in merger and acquisition [M&A] activity all have teams of expensive professional advisors, I speculated on why the people side was neve included in the due diligence process:
"What really bothers me is the way the system currently works for remunerating all of the professional advisors who provide services to the corporate world.
These people get paid via a combination of time sheet based fees and "by results" i.e. the securing of the deal - which so often is linked to a percentage of the value of the deal, so the bigger the deal - the bigger the fee...
...they have a potentially massive short-term advantage for 'pushing the deal' - and absolutely no linkage with the outcome of their 'professional' advice and the likelihood of taking their deal into the 70% of merger failures."
Applying Incentives In Everyday Life
In the examples above we have considered incentives in a business context but now I want to briefly outline how we can apply the mental model of incentives to everyday life.
The main reason for seeking to understand incentives in everyday life is to understand the motivations of other people and to see what it is they really want.
Moving away from the structured environment of the workplace and business interactions, money and status are not the only incentives.
In More In Common I noted that:
"I recall becoming very aware of this when I first traveled to, lived and worked in various countries in S.E.Asia. I noticed very quickly that despite our ethnic, cultural other differences at root, we all want the same things. We value the same things. We see things in the same way. We have more in common.
We all want to be loved, to be respected, we all want the best for our children, we all want to good health, at the most basic level we all want food, sex, shelter and money."
I recently read an important piece of research that, unlike most
studies which focus on differences, took a very large dataset and
calculated the similarities between populations:
A recent study undertook a large
international survey of 86,272 people and categorized them by age,
gender, education, nationality, education, and religion. The survey
asked them all questions to gauge their values around 22 different
topics (trust in science, the importance of education, morality, etc.)
The
researchers then cross-analyzed the data in every way they could to
determine which groups of people around the world are the most similar
and dissimilar.
In all, they ran over 168,000 comparisons and found that, on average, people’s values were 93.3% the same.
Given the commonality between most people, in everyday life a very good starting point for gaining insight into someone else's motivation is empathy.
The more you know about that person the more you will understand what incentivises their behaviour.
Return from "Incentives" to: Mental Models
LATEST ARTICLES
Like A Prayer - Life Is A Mystery
It Isn't The Process Of Prayer That’s The Problem, It’s The Way It’s Framed. Regardless of what we feel about Madonna or her song the topic of prayer often arouses strong reactions. Usually, it is som…How Things Really Are - The Inbuilt Design Flaws
Chaos, Disorder And Decay Is The Natural Order Of Things. Nobody has the perfect life. We all struggle and strive to attain health, wealth and personal happiness. Yet these three big areas: our health…Intuition Or Anxiety - Are There Angels Or Devils Crawling Here?
How To Tell The Difference Between Intuition and Anxiety. How do you know whether the voice of your intuition is real or just the product of your inner anxiety? Several months ago I was having a drink…What Is Truth - How To Tell A Partial Truth From The Whole Truth?
How the truth and nothing but the truth is often not the whole truth. My great aunty Flo broke her arm and died. It is true that she broke her arm in 1923. It is also true that she died in 1949. But t…Duality And Life Beyond Your Thinking Mind
Duality and life beyond your thinking mind focuses on the limitations of time, foreground and background, duality and "stuckness". The first aspect of duality and life beyond your thinking mind focuse…The Conscious Mind Is Limited - Be Aware And Be Prepared
Being aware is the first stage of being prepared. The conscious mind is limited in so many ways. There are some who would argue that there is no such thing as conscious thought and that it is represen…Your Inner Map Of Reality - Here's Why You Think The Way You Do
The big picture of how your inner map of reality creates your feelings, thoughts, and behaviours. Your inner map of reality is based on the filters of your own ethnic, national, social, family and rel…The Failure Of Cancel Culture - Suppression Not Engagement
Why we need to wear our beliefs lightly and develop negative capability. Throughout history people have campaigned to fight beliefs, ideologies, and injustices that they perceived to be oppressive, di…4 Big Reasons Why We Get Stuck In Our Attempts At Personal Change
Most People Spend Their Entire Life Imprisoned Within The Confines Of Their Own Thoughts. This first of the 4 big reasons why we get stuck is, in my view, the most important. The "self-help industry…How Do I Change And Why Is It So Hard?
We Would Rather Die Than Change, And We Usually Do In my experience, the vast majority of people who say they want to change don’t change. Most people reading this won’t change because they don’t real…The Illusion Of A Separate Self - Windows 11 With Self Awareness!
Beyond the content of your mind you are so much more than you think you are. When we talk of "myself" this is the conventional way of referring to our self image which is in fact the ego's constructio…Finite And Infinite Games - Dazed, Confused & Ultimately Transcendent
This is not an instruction manual, it is a wake up call!
Over this past week I have read Professor James Carse's highly regarded "Finite And Infinite Games - A Vision Of Life As Play And Possibility"…The Gap And The Gain - How Your Brain Sabotages Your Happiness
How Your Lizard Brain Sabotages Your Happiness We are hardwired to measure our progress in any and all areas of life where we have goals and aspirations. We can't not do it. But what we measure and ho…How To Wake Up - 4 Simple Practices To Help You Wake Up Now
So What Exactly Does It Mean to Wake Up - What Is "Enlightenment"? There is nothing magical, mystical or mysterious about waking up we’re actually having glimpses of enlightenment all the time. Enligh…Situational Communication - Different Strokes For Different Folks
Situational communication is about taking account of 3 often ignored factors about the other person. You are a situational communicator when you recognise that effective communication is not an event…How To Influence Without Authority - 6 Key Tips
The secret to how to influence without authority is that you get what you really want by giving other people what they really want. We live in an interconnected world and knowing how to influence with…Change Questions To Change Your Outcomes
Asking The Right Questions Is Critical For A Successful Change. Every time we initiate a significant change - whether in our personal life or in an organisation - we will most likely over-estimate our…Group Culture - The Invisible Software That Rules Your Life
Group culture is: "How we do things round here". We like to see ourselves as free agents making our own choices and living authentically but the reality is that The Matrix has many layers and we are u…Why Getting From A to B Is Not Aways A Straight Line
In circumstances of significant change, the progress from A to B will not be in a straight line. We run our lives largely on auto-pilot. In most circumstances your experience of getting from A to B is…The Art Of Persuasion Planning For Success - Here's How To Do It!
To be successful in the art of persuasion you must ensure that certain things happen. To be successful in the art of persuasion you must establish a framework of what has to happen to get you to that…The Art Of Persuasion Advanced Communication Skills - Gaining Buyin
Create The Environment Where They Want To Buyin to Your Proposal In order to build the win-win you have to uncover what it is that the other person really wants or needs, and to do that you have to as…The Art Of Persuasion The One Fundamental Principle - Create A Win-Win
The art of persuasion is based on the simple idea that you get what you want by enabling the other party to get what they want. Being a nice friendly person with good inter-personal skills may be a go…Communication Persuasion And Change - Key Skills To Survive & Succeed
It's not the strongest that survive, nor the most intelligent, but those who are most responsive to change, the most persuasive, and the best communicators. We are living in an age of unprecedented ch…The Eisenhower Box - What Is Important Is Seldom Urgent
What Is Important Is Seldom Urgent And What Is Urgent Is Seldom Important. The Eisenhower Box is a time management and decision-making model devised by President Dwight Eisenhower to help him prioriti…Zen Enlightenment [Satori] - The Stink Of Zen
Lost In Our Delusions About Enlightenment. There is something in human nature - a desire to glamorise, sanctify, objectify and idolise – that elevates people who have offered deep insights to the huma…5 Zen Mindsets For Mastery - In Any Area Of Your Life
The Wisdom Of A Person Who Masters In Any Art Is Reflected In Their Every Attitude. The state and quality of your mind has a very large bearing on the quality of your performance in any area of life t…Dealing With The Toxicity Of Online Dating - 6 Key Tips From A Clinical Psychologist
Toxicity Is The Price Tag Of Accessibility. In the early days of online dating, users were vetted and had to go through a registration process and agree to comply with a code of conduct designed to en…Why Understanding Ergodicity Is Critical To Your Long Term Survival
How Not To Be Fooled By Randomness. Ergodicity is an ugly word from the world of mathematics. It is an umbrella term for two sets of conditions of probability and outcome. These two conditions form th…Dealing With Imposter Syndrome - Ego Is The Enemy
How You Frame A Situation Has A Profound Impact On How You Respond To It Emotionally. Imposter syndrome is a psycho-emotional experience of a fear of being found out as incompetent despite ongoing evi…The Challenges Of The Road Less Traveled
Issues You'll Face When Playing The Long Game. The challenges of the road less traveled is loosely based around the phrase popularised by M.Scott Peck with his book "The Road Less Traveled". This arti…