Request for Comment: Incentive Systems to Maximise Quality

The following documents the doctrine of this firm going forward, it’s maxims, its principles and ideas on implementation.

You are welcome to read it and make comments.

Maxim: Focus on Excellence & The Incentive Mechanism

We have a super power that others will find hard to replicate: a powerful system of record keeping: the relational database.

The principle behind everything:

• reward good work, and correspondingly,
• punish bad work

The carrot and the stick is the key to our success.

This reward is in the form of a bonus, which is in addition to wages. This is also the stick, because it can be removed.

If you’re guaranteed a wage, it is human nature to tend not to care about outcomes or excellence: nobody cares to learn independently: to read memos, watch videos, read books, to create market materials etc. Except when there is something of consequence on the line - where they personally stand to benefit (and lose).

Show me the incentive and I’ll show you the outcome - Charlie Munger

You don’t need to see what people do to understand the outcome(s), you just need to understand the incentive mechanisms. This is Charlie Munger’s seminal insight.

If an organisation is not getting the results and behaviour it wants, it is because it is not rewarding that behaviour with incentives, or punishing bad behaviour with a stick.

For example:

• 5 years ago, when a job was won - there was no cause for celebration: nobody cared. In fact it was probably a cause for distress: getting someone to do the work after it was won was like pulling teeth.

Now:

• When a job is won, it is a foot race and a fight to claim that job. Many appeal to the boss, just like a crony appeals to the president for favours. This is not good, but it better than before. Ideally we want to remove as many obstacles between a client, and those doing the work to produce an outcome.

Maxim: Benefits Cannot Be Shared

Socialism has proven itself a criminal failure ⁽¹⁾, yet it constantly rears its head but in different forms.

Here is a true maximum: benefits cannot be shared - they must be given to the one who does the work. There were many in Pondicherry who would have loved to get a cut of the bonuses paid to Chennai. Yes it is great for Pondi to receive the big bonuses earned by others, and correspondingly it is a criminal act for those who’ve put in the hard work over many years - some for a decade - to see someone else earn from your hard work. Hence: If you work, then you receive the benefit. But if you do not contribute to specific outcome, then you cannot expect to benefit. If we rewarded this type of behaviour, then everyone will have an incentive to mooch.

Maxim: Individuals Must Bear Consequences

The corollary is that if there is a failure - someone should directly feel the pinch. It exists everywhere, except in government. This is why government services are absolutely horrific. Government employees do not give the damn if their “clients” / constituents suffer - they still get paid either way. There is zero incentive to fix broken systems, but rather, everyone is happy to shaft citizens. And the user experience is horrific. But I promise you, if someone felt a direct COST for bad service: then things would dramatically improve.

Corporate back-charges May apply for Appropriate Use Cases

Case study: A friend of ours used to work at a car dealership: inbound leads would arrive by phone. Someone must pick up the call. Everytime the phone rings out or the caller hangs up due to noone manning the phones - you are potentially saying good bye to a sale. That would mean: $5-10k in sales commissions, and perhaps $500 - $1000 per annum in serivicing fees. The cost is very high if someone is too lazy or busy to answer a phone call.

Therefore a rule was a applied: if nobody picked up the call in x5 rings - then a collective cost would apply to EVERYONE. No exceptions. That may be necessary in our firm for certain use cases.

How to Structure it? Benefits & Costs: Their Application

How are they to be applied?

(A) To individuals and/or (B) AND an entire body as a whole, and/or (C) At varying rates, and/or (D) At varying Times, and/or

……. depending on various KPIs whhich can be recorded / tracked via our app: i.e. we can make some or all contingent on certain outcomes and or use them to drive a desirable behaviour, which is measurable.

Some Examples

Sample Application: Proving Skills:

• e.g. we have a moodle quiz on MTOs. Everyone must do it. “Yes sir we will do” says everyone. Except they don’t. It is very hard to make someone do it when they do not want to. However, since we are managing their bonuses on the app - we can delay bonuses until they prove that they have completed the tests on Moodle. We could create records to verify this and delay all bonuses till the work is done. This will incentivise the creation without constant reminders.

• Sample application: Corporate backcharges if someone doesn’t allocate The same can apply here: it is a struggle to get people to do Member Counts, within a time frame. They are much more incentivised to do MTOs, and detailing jobs. However, if the MC does not come, in time, then we cannot quote in time and we could potentially lose out on some very big jobs. This is an immediate application. However, when a detailing job is won - then everyone appeals directly to the president. Yet when a MC comes in, nobody appeals to the boss similarly. Why not? Because many presumably want someone else to do the work, while they collect the benefits, which is a violation of the maxim above: that benefits cannot be shared.

Therefore a collective back charge applied to our friend in the dealership, to make sure that a phone never rung out. And it would always be picked up promptly in that car dealership.

• Sample Application: Bonuses Contingent on Timelines Right now there is every incentive to “win” a job, and not care about its timeline or prosecution. I want to directly incentivise its early completion via contingent bonuses. Necessarily there are things outside ones control - ok that is fine. We can account for it vai record keeping.

Sample Application: English

• Poor English: $x / hour. Some will be happy with this.
• Mediocre English: $x + y / hour.

Sample Application: Skills and Contributions:

• If you can prove competence in XYZ then your billables will be ABC.
• If you can write xyz blog posts a week.
• If you produce excellent training materials etc.
• If you improve the business in a certain way etc.

What is not tolerable: reducing the quality in order to get paid

Do not water down or in any way inflate or dilute the quality of the work required to get a reward.

There will be overwhelming pressure to dilute, just like the central bank has immense pressure to print money.

Further Invitation: Please provide your comments / ideas!

I would invite comments on: (i) what should be incentivised, and (ii) how?

We have a rails app, a relational database, and can do just about anything you can conceive. Your suggestions will be invaluable.

⁽¹⁾ One of my favourite examples of its criminal failure is in the New World experiment and thanks giving.