Request for Comment - An Incentive System Built via Relational Database

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

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

If you are not getting the behaviour that you want, it is because you are not rewarding them with incentives.

For example:

• 5 years ago, when a job was won - nobody cared. In fact, getting someone to do the work that you pay them to do was like pulling out 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.

Why? It is because the incentive system has changed.

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 works.

If you work, then you receive the benefit.

But if you mooch, then you cannot expect to benefit, because everyone will have an incentive to mooch.

Individuals Must Bear Consequence

The corollary is that if there is a failure - someone should directly feel the pinch.

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.

The same with Telstra staff. There is zero incentive to fix broken systems, but rather, everyone is happy to shaft customers from one “department” to another. And the user experience is horrific.

But I promise you, if someone felt a direct COST for bad service: then things would dramatically improve.

Backcharges for individuals

Backcharges work because costs are directly imputed to the cause.

Previously in our firm, if a client was dissatisfied there would be no consequence to anyone, even the offending party. Now, there is a severe consequence to the offending party. Yet everyone is penalised at a corporate level, because when a customer walks out the door, that corporate costs exists for all, but is not felt by all directly.

e.g. if Rahul does a bad job, it is of no particular consequence to me. I have no incentive to ensure that Rahul is across everything. However, if I am in any way invested in Rahul’s performance, when he walks into the office, even a side-long glance is enough to pull Rahul into line.

I may demand that Rahul is up-to-date with Australian Standards. I may even commission tests and blogs and demand compliance, if I am invested in Rahul’s competence.

That is what I want here.

Corporate back-charges and Contingent Bonuses may apply

For example: when our man Mr Chako was working at a car dealership: inbound leads would arrive by phone. Someone must pick up the call. Everytime the phone rings out - 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.

• 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. Howevever, 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. Here is an immediate application. However, when a detailing job is won - then everyone appeals directly to the president. The job is won on political whim, rather than merit?

Therefore a collective back charge would need to apply to make sure these things do not happen. And they will never happen, because the phone would always be picked up promptly in Mr Chako’s dealership.

• 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.

Our Advantage - The Relational Database and Record Keeping

We have a very powerful ability to control incentives via a relational database, and perfect record keeping. Provided we can channel and reward incentives better than anyone else, we will be able to produce results, better than anyone else in the industry. Because nobody has such a means readily available to them.

Some Examples

Suppose we want to incentivise a certain behaviour.

We can tie it to a quality metric that is direclty measurable.

e.g. telling people: “you need to improve your English” they laugh at you. “Yes sir!” all the ‘yes-men’ cry in unison.

What you can play with:

(a) Individual bonuses. (b) Individual back-charges (c) Corproate bonuses. (d) Corporate back-charges (e) and the TIMING of those payments

…….we can make some or all contingent on certain outcomes and or use them to drive a desirable behaviour.

Bonuses Tied to the Quality of English:

• Poor English: $30 / hour. Some will be happy with this.
• Mediocre English: $35 / hour.
• Good English: $40.
• Excellent English: $50.

Increments must be tied to this. Do not water down or in any way, inflate or dilute the quality of the incentive system.

There will be overwhelming pressure to print, just like the central bank has immense pressure to print money, do not dole out english speaking skills accreditation to any donkey who applies.

This will force people to get better.

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