Business Incentives

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Everything that is done, is done through an incentive.

Some incentives are more abstract than others.

But everything that is done, is done by a mechanism, that is driven by an incentive.

An engine converts potential chemical energy into mechanical work.

The incentive for the motor is an increase in entropy — giving energy.

Or put another way, incentives are to people, what energy is to physics

Incentives are to people, what energy is to physics

Well, this is what was winding around my mind these past few days. Every instance I can find in business management, seems to boil down to correctly aligned incentives. I mean, we all know that phrase; “Incentives Matter” — the economic phrase that I’d heard on and off, both in a negative and positive light.

The funny thing is that every company I’ve worked at, or understood thoroughly, has significantly misaligned incentives. And the fact is that these ‘incentives’ (rewards distributed to individuals for contributing productive work) need to be aligned so stupendously well!

Incentives must be as aligned as forces in an engine

We need to align incentives like electrical engineers align microchips. Or like mechanical engineers align metals of various shapes to form a functional engine.

“Incentives Matter” is not a cool business tip.

“Incentive Matter” is not a economic hypothesis

INCENTIVES ARE THE BUSINESS ITSELF.

That’s the point of view that I’ve created within the confines of my mind. One human being (myself) has pondered their experience, and concluded the above. Maybe it’s time to bring in some other minds. Perhaps some minds that literally think of this stuff for a living.

And by the way, I’m writing this in real-time. This is me processing the problem. So I could be wrong and the rest of the article could disprove everything I’ve said — cool aye!

The example of the Bus

I’m currently reading chapter 1 of ‘The Economics Perspective: Incentives Matter’. And wow, let me tell you — it’s exactly what I said above.

The problem is as follows:

  • Bus drivers do not drive the fastest route in Chicago despite knowing all of the fastest streets.
  • When people drive their own cars, they do drive the fastest route.

So the question is:

  • Why don’t the bus drivers do as the commuters do and take the fastest route? It is the incentive of the business to do so.
  • So clearly the driver’s incentives (get a wage) are not aligned with the passenger’s incentive (get home)

The answer:

Since the passenger’s incentives are to ‘get home fast’, we need to aligned the drivers incentive to be the same. In Chile, they did just that: They paid drivers by the passenger — instead of by the hour. I’ll let you guess determine the outcome.

I ordered pizza the other day. As I ordered, I pondered if it would be faster to get an Uber to collect the pizza — rather than getting it delivered in-house by the pizza company. And since I ordered an Uber eats the day before, I knew the kind of speed I could expect. Unsurprisingly, it took the pizza company three times as long to deliver than it took the Uber driver who’s paid by delivery — with a generous tip.

Concluding remarks

I would like to go a lot deeper into this topic. I’d like to explore an actual model company with managers and employees, and determined quantitatively how well the incentives are aligned across the board.

I’ll save that for later, have a good day.