Posts Tagged ‘ Incentives

Three Incentives Questions for Metrics

Perverse IncentivesUnintended consequences and perverse incentives are as old as social organization. [See Wikipedia's unintended consequences page for an interesting and informative list.] Many of them could be avoided by asking a few simple questions ahead of time.

1. Can this metric be manipulated without improving the underlying business?

If so, employees are inventivized to take the short cut.

Example: PM schedule compliance

As commonly measured, PM schedule compliance allows dates to be moved or schedules to be adjusted or old work orders to be completed out in order to bring the numbers up.

2. Can this metric be improved through undesirable or unintended behaviors?

If so, then the benefits of improving the metric will be offset in ways probably not measured.

Example: MTTR

MTTR encourages maintenance employees to store and hide extra supplies or take short cuts in workmanship to get jobs done faster.

3. Can this metric be improved by sacrificing long-term productive capability?

If so, then short-term results will turn into long-term decline.

Example: earnings per share

If earnings per share is growing at five times the rate of revenue or more, watch out!

Are these metrics, therefore, invalid?

Not necessarily. But consider selectively sharing the information or de-emphasizing them in benchmarking efforts in order to mitigate the risks, MTTR in particular is especially useful for planning purposes, but not for incentive schemes.

Back Home in Derry: A Tale of Convict Ships

Belowdecks on a Convict Ship Bound for AustraliaCharles Koch references the British convict ships in his chapter on incentives. To demonstrate the power of incentives, he points out that when Britain began exporting its convicts to Australia, most of them didn’t make it. The government paid ship captains by the number of heads leaving, so captains jammed as many as they could on board.

To reduce deaths, the government instead paid by the number of people who actually made it to Australia. Once properly incentivized to preserve their charges, the fatality rate plummeted.

There is a saying is attributed to Stalin: one death is a tragedy, but a million deaths is a statistic. In the same sense, the fate of the convict ship prisoners is a mere statistic.

However, I recently ran into an old song called “Back Home in Derry.” I don’t know who sang the version I have, but it’s a fascinating story of one man who survived the journey.

The lyrics follow.

In 1803 we sailed out to sea
Out from the sweet town of Derry
For Australia bound if we didn’t all drown
The marks of our fetters we carried
From the rusty iron chains we climbed through the wanes
The good women we left in sorrow
As the main sails unfurled our curses we hurled
At the English and thoughts of tomorrow

At the mouth of the foil we fell ill to the soil
As down below decks we were lying
O’Doherty’s scream shook him out from a dream
Of a vision of old Robert dying
As the sun burned cruel they dished out the gruel
Dan O’Connor was down with the fever
Sixty rebels today bound for Botany Bay
How many would reach there this evening?

[Refrain]
Whoa….oh, I wish I was back home in Derry
Whoa….oh, I wish I was back home in Derry

I cursed them to hell, as our bow fought the swell
Our ship danced like moths in the firelight
Wild horses rode high as the devil passed by
Taking souls to Hades by twilight
Five weeks out to sea we were now 43
We buried our comrades each morning
And in our own slime, we were lost in time
Endless night without dawning

[Refrain]

Van Diemen’s land is a hell for a man
To end out his whole life in slavery
Where the climate is raw and the gun makes the law
Neither wind nor rain care for bravery
Twenty years have gone by and I’ve emptied my bond
My comrades’ ghosts walk beside me
Well, a rebel I came and I’m still the same
On a cold winters night you will find me

[Refrain]

Rewards and Feedback

Charles MurrayQuoted in chapter 7 of The Science of Success:

The only combination of rewards and feedback that seems to improve motivation is rewards that depend not only on doing the task, but upon how well it is done plus informational feedback.

Charles Murray

Weekend Reading: RCM, Influence, Mastery

Miscellaneous ClassicsFrom MindTools:

Cialdini’s Six Principles of Influence: Convincing Others to Say “Yes”

Monroe’s Motivated Sequence: Perfecting the Call to Act

From HBR Blog:

Ron Ashkenas: Get Passive Resisters to Embrace Change [First sentence: "People can be extremely indirect in how they resist change. " Amen, brother! Also, there is an interesting comment by "The Grumpy Project Manager."]

H. James Wilson: A Fast Track to 10,000 Hours of Practice

From Gary North:

Gambling and Entrepreneurship: Never the Twain Should Meet

From Lube Tips:

Controlling Lubricant Degradation with Nanoporous Materials

From ReliabilityWeb:

An Introduction to RCM

SAP – The Full Functional Location Set-Up

A Tough Diagnosis – The Saga of the Never Ending Problem

From YouTube

The future of America?: Broken Escalator (2:03) [h/t Rooted in Prosperity]

From TED:

The following videos meander a bit, but draw some pretty strong conclusions, especially Larry Lessig’s presentation. The common theme between the two is that the internal contradictions of two modern institutions (scientific research and copyright protections) are converging on increasingly perverse incentives.

Unfortunately, the perverse incentives are addressed more through moralisms than by the creative solutions that we usually associate with TED. It is much easier to say “this is wrong” than to design a better way of operating that can actually be implemented.

However, business leaders should balance these proposals against the hysterical intellectual-property mindset that is hampering innovation and making competitors out of people who work in the same facilities.

Michael Nielsen: Open science now! (16:36)

Larry Lessig on laws that choke creativity (18:59)

Weekend Reading: Praxeology and Austrian Economics

There’s no reading this week… just videos!

This week we take a brief step back from “practical” subjects and look at basic economics. Specifically, economics from the Austrian perspective.

For the unfamiliar, Austrian economics forms part of the foundation for Market Based Management. It is also the most free-market-oriented school of thought in the world. If you think “Chicago school” economics is free-market oriented, Austrians make them look like a bunch of interventionists.

Austrian economists also predicted the stock market bubble and the real estate bubble collapses long before anyone else did. Their theory of the business cycle, predicated upon central bank money manipulation, has been spot on with respect to macroeconomic cycles.

Rather than get into a lot of dry theory, here are some of the most entertaining videos on economics you will find that present the Austrian thought process.

From EconStories [YouTube]

From PraxGirl [YouTube]

Praxeology, the study of purposeful human action, is the focus of Ludwig von Mises’ tome Human Action. However, it will generally take years of study—a “black belt in Austrian economics”—to crack it. For those who prefer more immediate intellectual gratification, particularly members of the male demographic, this series of videos serves as a gentle introduction.

A Powerful Mental Model of Human Action

Fairy Tale PictureOne of the most powerful ideas from Crucial Conversations—and elaborated in Crucial Confrontations—was Master My Stories. Master My Stories is a method of understanding how what we see leads to what we do. Understanding this mental model helps in two ways: in controlling the stories you tell yourself and in understanding how others react to what happens in their life.

A good description begins with how feelings result in actions. The typical mental model people have is that they observe someone or something, they feel based on what they see, then they act based on their feelings.

See & Hear -- Feel -- Act

A common misconception is that how we act is based on how we feel, which is a product of what we see and hear.

The authors make the argument that this model misses a step. In between observing and feeling, we tell ourselves a story. That is, we fill in the gaps in our knowledge with a narrative.

See & Hear -- Tell a Story -- Feel -- Act

A more accurate model of action according to Patterson is that after we see & hear, we tell ourselves a story, which causes feelings, which lead to action.

For example, let’s say someone makes an ambiguous comment to you: “Your hair looks nicer than it usually does. Did you get it cut?” While the commenter is perhaps lacking in sensitivity, the receiver of the comment has a choice: They can tell themselves a story wherein the commenter meant well, or they can tell a story where the commenter meant ill.

If the receiver convinces themself that despite a lack of tact the commenter meant well, they feel fine and act appropriately.

But if the receiver convinces themself that the commenter was making a backhanded criticism of their “usual hairstyle,” then they may get angry and act out their anger by resorting to silence (withdrawal) or violence (e.g. a snide or sarcastic rejoinder).

Either way, the receiver has made many assumptions about the situation, the character, and the intent of the commenter. However, one story leads to poor feelings and resentment, and the other leads to a pleasant conversation and a better day. Which is the more productive mindset?

Mastering YOUR Stories

To get control of your own behavior, start with how you are acting. Is your behavior consistent with what you really want? If you want more affection from your significant other, is your sullen silence ever going to achieve that? If your behavior will not logically get you where you want, it’s time to explore further.

Next, ask what emotions are leading to that behavior. For example, you feel bitter, which is leading to sullen silence.

Next, explore the story that is creating the emotions. In our example, you feel bitter because your partner has been ignoring you and disregarding your attempts at conversation. It is because they are obsessed with their work and don’t really care about what’s going on in your life.

Finally, examine the evidence supporting this story. Our significant other has been spending an increasing amount of time at work. That’s it.

Is the story “clever?” Does it feature archetypes like the villain and the victim? Simplistic stories seldom match reality. They often gloss over “the victim’s” role in creating the problem.

Continuing our story from above, it turns out that our partner is worried about money and is doing extra work, either for overtime or job security. The reason they are worried about money is that over the last three months the credit card bill has increased significantly. The reason the bill has increased is some frivolous impulse purchases we have made.

With this knowledge in hand, we can no longer play victim to a mean-spirited, villainous, insensitive significant other.

A useful question to ask is, “Why would a decent, rational, and reasonable person act this way?” It forces you to tell yourself a different story.

The Stories Others Tell

At the same time you’re telling yourself stories, others are doing the same. What stories are they telling themselves about you? Upon what evidence are they telling those stories? How did your actions lead to that story being told?

It’s possible that they their story, with you as leading villain, is exaggerated. Maybe your well-intentioned suggestion has resulted in your becoming an insufferable know-it-all. If you wish to preserve the relationship, your next step is to persuade them that the story is false. Recognize that until the story changes, the feelings won’t change.

Or, you can get upset and choose to play the role that has been created for you and make snide comments sure to offend. Then again, what do you really want?

Downward Innovation

Forklifts connected "in series"

Is this what you meant by employee empowerment?

Some time ago, I sat transfixed as an industrial operations leader explained to a large group of employees that they would no longer be provided with checklists and procedures. Going forward they would learn to be “entrepreneurial,” and do their jobs without such “authoritarian” tools.

This paradigm was confirmed by a machine operator who told me on another occasion that in their area, they did not use procedures to start equipment, while “over there” in another area, their brutally authoritarian supervisor made them turn in various check sheets.

Both areas had an issue that was overloading certain bearings, resulting in serious maintenance expense and downtime. When investigation brought to light the role of the equipment startup procedure in overloading the bearings, guess which area was better able to institutionalize the new knowledge?

The day that the operations leader spoke about entrepreneurship, I was transfixed because I had been communicating the opposite message to many of these employees for weeks!

In another interesting situation, a new procedure was developed for doing a dangerous task. The new procedure was clearly better for safety and for the equipment. Safety incidents had resulted from doing the procedure the old way. However, it did take longer to perform the task, and the task was generally performed under time pressure. Yet, the environment where the new procedure was introduced was one in which challenge was encouraged when new procedures were inferior.

What should an entrepreneurial employee have done when the new procedure was introduced and explained? Some employees embraced it. Others ignored it. There were no consequences for those who neither followed it nor challenged it.

Did the executive leadership have such situations in mind when they spoke of decision rights and innovation? I highly doubt it.

One fascinating development related to the movement to empower employees has been what I have termed “downward innovation.”

Typically, when leaders speak of innovation and entrepreneurship, they are referring to implementing employee ideas on completing tasks more effectively, with less waste and redundancy, and to higher standards of quality. As owners of the means of production, the theory goes, employees will be have a strong incentive to ensure their livelihood, often in the form of equipment, stays working.

Yet, newly “empowered” employees sometimes do the opposite. Rather than raise standards, they decide to lower them. Rather than taking extra time to do a job, they use their new authority to take shortcuts… and then resist change when new knowledge reveals better ways of producing.

None of this is to say that empowering employees with decision rights is the wrong thing to do. The question of how much authority to give an employee requires systems thinking, rather than right-wrong blanket decisions. Here are a series of questions to ask when considering shifting decision rights to employees:

  • What’s the objective: is it more important to do the job right—with resulting improvements in safety and reliability—or is it more important to shift decision rights somewhere?
  • What are the employees capabilities? What is the plan for any needs identified?
  • What are the potential problems with the change and how do we address it?
  • Where does the employee go for help in the early stages when they will probably need it?
  • What are we trying to achieve? How is that to be measured? Is there a reasonable plan with targets and expectations that can and will be monitored?
  • Does the initiative help or hinder institutional learning? If the work processes are not followed, they can not be improved. As a starting point, leaders must have the conversation and acknowledge this tradeoff.

What would you do to avoid Downward Innovation?