Incentives Matter

Way back in 2008 I took a basic economics class at CUNY Hunter College. The prof was the chair of the department, a long time economist and teacher who actually liked teaching the huge seminar course. There were over 200 in that class when it started. I think maybe 90 of us survived to the end. If I remember correctly I got a B or B+ in the course. Hard? For me yes it was. But I learned, and I took away something that I’ve applied to lots of things I’ve seen in the news over the last few years.

On the very first day of class the professor told the class a story about New York’s homeless situation and how people got to the front of the line for getting into city housing. Apparently there’s a clause in the laws that govern getting into that housing that states something like if the person applying is a mother or about to become a mother that person goes to the top of the list for housing. Which, on paper, makes perfect sense. Mothers with children need to be taken care of. But there’s a way to game that little clause. And many people apparently took advantage of it over the years in order to obtain cheap, mostly reliable housing for themselves. Who took advantage of it? Older teens who just wanted their own place for one. They’d get themselves pregnant, tell the housing authority they’d been thrown out of their homes, and be put on the top of the list for a place of their own. Some just faked the pregnancies and then had boyfriends move in with them. Others brought relatives from other countries to live in the apartment. I don’t know if this loophole still exists, or if any of the things I heard about still happen, but the gist of this story is one thing. Incentives matter. Across the board in all areas of life, give something an incentive that appeals to people and they will figure out how to take advantage of it, both for monetary and other types of gains.

America has always been the land of opportunities. And giving incentives to fuel those opportunities is part of the whole. Make something worthwhile, we think, and it will not only get done, it will get done well. Sometimes it does. Sometimes those incentives give people good ideas, and they run with them, creating amazing things. Other times those incentives wind up costing more than originally thought because people gamed the system to take advantage of what looked like ‘free money’.

What kinds of things have I seen? The VA situation for one. An incentive was placed on the VA to gain bonuses for employees. So people in the VA looked at how they could gain the money even if they didn’t really meet the criteria. Loopholes were found in the computerized system so that wait times would not look as bad, and employees would receive those sought after bonuses. In the medical profession alone, doctors and other medical personnel are given incentives to receive payments from both private and governmental insurance agencies that perhaps they did not really earn.

I suspect that at GM prior to the current managerial group there were incentives for people not to report problems, or ignore them in order to continue to make profits larger and therefore be able to pay out to shareholders to keep them with the brand, as well as to bring in new shareholders. Any public company whose life depends on what its shareholders think and do is going to create incentives to keep making more profit.

In education there has been a program called Race to the Top that came out of the federal push to get the states to adopt the Common Core Standards put out by the Board of Governors. In some cases states that signed on did create programs that are helping students. Others are simply playing with data to create reports that look good in order for the Race to the Top monies to be paid out. Look at your local school district’s standard testing rubrics. I suspect you will find that raw passing scores are set very low in order to get more marginal students to look like they are making progress.

In business states and localities are incentivizing tax programs to get businesses to move into their areas. Low or no taxes for a certain amount of time, or other incentives that would make a business decide it was a good thing to move into that area. For some businesses these tax programs get them there, and once the program time runs out they move the business elsewhere. In America the incentive is in not paying the taxes, being able to keep more of your profit. There is no incentive to actually pay taxes owed in business, rather the incentive is to look for any loophole in the local, state or federal tax codes to make it possible not to pay taxes.

America prides itself on its ability to create wealth. To create opportunities for people to do better. But to my mind many of these opportunities are gained through incentives that backfire. People look at the monetary or other gain and run with it, no matter if they earned it or not. I recently came across a book that I need to read. “Drive” by Dan Pink. His conclusions are summarized here from another blog post I came across. I claim no license in the following list.

  1. They can extinguish intrinsic motivation.
  2. They can diminish performance.
  3. The can crush creativity.
  4. They can crowd out good behavior.
  5. They can encourage cheating, shortcuts, and unethical behavior.
  6. The can become addictive.
  7. They can foster short-term thinking

A business can bring in new customers or keep customers coming back through monetary incentives given through social media or other means. Coupons and special deals will bring in a customer – but are those customers really loyal to the business or the brand? Probably not. They were given a monetary reason for short term adherence. Financial products and banks bring in customers the same way, offering incentives to sign up. Unless these incentives are continuous, customers may flee when the incentive runs out. My own husband used to switch credit cards about once a year in order not to pay interest on debt he’d wracked up. I suspect many others out there did this as well when it was easy to get credit cards and switch them quickly.

Incentives matter. I will always remember this phrase. I might even create an embroidery sampler to put up on the wall of my home office. It will get me to keep thinking about how an incentive might influence outcomes.

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