We’re going to outline:

• what motivates individuals to labour.
• how incentive mechanisms in large organisations break down, and how this can be changed for the better, with a:
• A case study at Tek1.

Individuals are motivated by selfish ends

Adam Smith, in his seminal work, elucidated a principle, which underpins all modern economies:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

Workers toil for themselves, not others: a farmer will not toil if he cannot reap. A runner will not persevere, if he is forced to share his wreath. When they labour for selfish reasons, other people benefit too. This is Smith’s key insight. I will add that immediate hunger drives them, not tomorrow’s per se.

Much of the abject suffering of the 20th century could have been avoided if the civilised world heeded Smith’s lesson.

Almost nothing worth doing, can be done alone

Almost nothing worth doing, can be done alone: the resources brought to bear on a problem are too feeble. When people aggregate their labour, to a common purpose: amazing thing can be built.

Align the incentives in cooperative enterprises

In corporations, individuals typically trade their labour for a wage. This is not without problems:

Problem 1: Wage Employees are not motivated to do a GREAT job

In our experience, the output of wage earners tends to be mediocre at best: just good enough to keep the job, but not bad enough to warrant dismissal. And they require require an excessive level of managerial oversight.

A daily wage might have worked well in agrarian economies. There, it was relatively easy to assess whether: (i) a job had been done, and (ii) done well. For example: how many kgs of rice have you harvested? Or, have all the golf balls on the driving range been picked up? One can easily verify this by glancing at the driving range: you can see any unpicked balls a mile away. And how can you assess its quality? Either the balls are picked up, or they are not. Quality does not matter. Contrast this with having a mechanic check your car: he claims to have inspected it, but how do you know? And how do you know if he has done a thorough job at it? The transparency is not there. It’s not as easy to determine if he’s done a good job, unless you are standing right there, with him, every second of the day. Do mechanics service others people’s cars with the same level of care that he provides for his own? I think not.

That’s the problem which needs solving.

Problem 2: Diffusion of ownership/responsibility

In any large enterprise, if a single customer is lost, the worker on the production line does not immediately care: he still has his job, and has food on his plate.

The immediate costs are not borne by them materially, nor by anyone, apart from shareholders. It is a tiny marginal loss: a single cut, that barely stings. But accumulated, a thousand cuts are lethal. This is what I call, a diffusion of responsibility.

The pain may be felt many years later (through furloughs or retrenchments), but only if the losses accumulate. It’s tomorrow’s problem, not today’s.

The problem is that the penalty of losing a customer is too small, and too indirect for anyone in a large cooperative enterprise to care….but that can all be changed as a result of: (i) better incentive systems and (ii) efficient record keeping. The problem of the commons can be solved:

(A) Better Incentive Systems

Let’s outline some incentive systems that have worked well:

(a) Tips

Juxtapose the customer service experience received in any restaurant in Melbourne vs USA. Service in the former city is usually abysmal: employees are paid a yuuuge wage, with little incentivise to provide a GREAT service. Scowls, a lack of hustle, and bad attitudes are de riguer.

Contrast this with the USA: the service is immensely better: tips are paid, directly proportional to the quality of service rendered, by the person receiving those services. It makes all the difference. The system is “complete”, without perversion. And because the waiter’s remuneration is variable, he or she is usually driven to deliver apposite outcomes:

“Don’t order the fish today,” says the waiter. He knows the fish is old, and terrible. That might influence his tip.

Or the waitress may berate the chef internally: “Can you please improve the cooking on your pasta? It’s horrible and is costing me tips.”

Waiters can drive quality improvements that benefits the entire business.

(b) Extra Billables

We used to pay a wage at Tek1. But I felt that staff were sloppy: they weren’t dotting the “I”s and giving their clients a GREAT experience.

How could we change this?

We’ve introduced a concept we call “Extra Billables (EBs)”: a huge proportion of our hourly variation work is paid directly to the detailer. If there are no problems on the job - great - employees receive EBs on variation work. But if there’s an error, then he loses his EB: the entire lot. Now, the employee cares very much about his work: he checks it thoroughly, and is incentivized in every way to make sure there are no errors. The only negative is that he’s not incentivised to make sure the customer has a GREAT experience. There’s a difference.

I plan to build upon this concept, to make employees care much more about the over-all aspect of a particular job: whether clients are routinely updated on the status of their project, or whether efficient solutions are presented to them. Perhaps I will pay them a “tipping” bonus: the client rates the detailer on his project. If it is done well, then he receives a maximum tip. And correspondingly so if employee is sloppy. These ideas are not fully fleshed out, but I have seen so far the immense benefit of aligning incentives.

I am hoping to devise incentive structures which drive productivity gains, not just for individual detailers, but for other teams within the organisation.

(c) The threat of Loss

Have you ever given a dog a bone, and then attempted to take it out of it’s mouth? They will viciously defend what they have. I have noted, similarly, once you give an emolument to an employee, with the threat of removal if their work is sloppy - carelessness drops dramatically. This is effectively built into our “extra billables system”.

(d) Punishment as a driver

It’s generally a poor mechanism. A rewards system, with the fear of loss is usually a better one. In other words:

“The Carrot is Mightier than the Sword” - Ben Koshy

(e) Competition as a driver

Does the NFL / AFL administration step into the nitty-gritty of team training sessions, training regimes, productivity drivers etc? Certainly not. The structure is a merit-based: teams are ranked, and the winner gets a trophy / ring. All teams strive for this. It should be the same for your teams.

We have a big problem at Tek1. Staff are happy to spend a day clicking around, when they could devise productivity tools to do the work in 1/2 the time or better. There’s no interest to improve efficiency. The incentives are indirect, via lower EBs. I propose to change this:

Teams should be ranked according to their productivity (i.e. overall billing). Those that bill more, and return better client satisfaction surveys, get paid in direct proportion to their billing. The top team gets the biggest share of the pie. Less efficient teams get a smaller share. Last place gets less. But just enough to get by.

In this structure, there will urgency in getting jobs done. Efficiency will become marked over a long period of time. Rankings will be affect remuneration. I know this system will work because clients will be happy to pay for fast, accurate drawings.

(B) Efficient Record Keeping & Payment Systems makes solution(s) possible

At the click of a button, we can now dispense enormous emoluments according to pre-defined rules. Governments already do this with their social security systems. Pay-roll departments do this too. But its all tied to wages…..Computer systems make it possible to cheaply, and accurately log and administer a host of complex reward mechanisms. In our case, computerised systems allow us to accurate record extra billables, replete with justifications etc. And devising other systems, should be relatively easy with modern day computing, and I would love to see them employed in other organisations. The result: better work, happier customers, and more satisfied employees.

I’ve devised a tool which synthesises the above principles into a tangle solution: I call it the Quote App (the name is somewhat misleading). Ostensibly, it is a documentation management system. But really, it is an implementation of an incentive system. What you see there is result of an evolution of ideas, where problems were found and solved many times over. It was originally a crude lump of steel, built on Rails 4. But it has been beated and tempered many times, and dare I say, it is now sharp. And immensely useful.

We will all prosper for it too. I can only marvel what wonderful things we will build in the next 1000 years, if we manage to better align incentives within a corporate structure. The invisible hand will be writing “prosperity” on the wall.