Often when we speak of incentivising somebody we mean giving them more money than they are currently getting for whatever task we want them to complete.

At some point in the last quarter of a century, incentive and financial incentive became viewed as one of the same thing.

This has led to the political situation whereby the left underestimate the power of incentive, and the right drastically overestimate it. However this is because both sides are misrepresenting incentive.

In any human social system, incentive is key to allow that system to function. For instance in a family setting whereby there are two adults and one child, the mechanics of incentivisation is constantly at play.

Those incentives will drive the actions of each member of the family, whether it is to work, play, or socially interact, incentivisation is behind a large majority of the actions of the individual members.

Understanding these drivers, is key to the smooth running of the system, whether that system be a family, a business, or even an entire country. All in all, we can say that ignoring the power of incentive will lead us down a road of confusion and under-productivity.

Incentive To Deliver

Charlie Munger, in my mind, is one of the smartest people on earth, he is Warren Buffet’s right hand man, and is perhaps the modern equivalent of the wise old village elder.

In his time he has been asked to consult on many businesses, one in particular stands out above the rest.

Sometime ago, a courier company started operating under the then unique selling point, of guaranteeing next day deliveries across the United States.

The model was simple, packages were picked up from their origin, then sent to a main depo somewhere in the middle of America.

The packages were then sorted into bundles, packed onto planes, and flown around the country to be delivered the very next day.

The company had borrowed a lot of money in order to get off the ground, and fairly early on in their corporate lives they were in trouble.

Their main problem was that the planes at the main depo, were not getting packed in time, meaning they took off late, meaning they did not deliver their packages on time. Seeing as they were giving a money-back guarantee, late deliveries had a directly negative effect on the company’s bottom line.

Various managers and executives within the company had looked at the problem, they had met with the packers, they had raised their wages a number of times and that hadn’t worked.

In fact, when it came to earnings, the packers were well paid for the job they did.
All to no avail . . .

Finally Charlie Munger was called in to consult on the issue, he at once realised that whilst incentive played a part in motivating these workers, it was not a financial one that would solve this problem.

He told the company execs that the men who were packing the planes were working the graveyard shift. Therefore they weren’t motivated by a dollar more an hour, but rather going home to sleep.

Munger suggested that the company incentivise the men by telling them whichever crew finished their work first, they got to go home, regardless of the time.
Guess what . . ?

Planes started getting packed in record time, deliveries went out ahead of schedule, the men got to go home to their families, and the world kept on spinning.

Another example in this area; a friend of mine has a fashion label and is at the moment planning his relaunch. A major part of this will be a photo shoot, showing off the new line.

He is keen to look as professional as humanly possible, whilst subsisting on a shoestring budget.

One way he is hoping to achieve this is by using top quality, well-known models.

However the problem with using these models, is that they are used to earning around $7000 per day, which is more than my friend can afford by a factor of about one hundred.

My friend almost made the mistake of offering each of the models a couple of hundred pounds (circa $275) each. Luckily though, his mother happens to be a long established fashion photographer.

She told him that it was better to find models who were into the clothes and the theme (boxing) and offer them nothing.

His mother said the reason for this is that a couple of hundred pounds is so far below their usual rate, that they would view it as an easy-to-turn-down low paying job.

However when it is just somebody asking for a favour, and giving clothes away in return, it then becomes a cool thing that they are doing because they like the vibe and would like to get their hands on some special edition clothing.

Lo and behold, it worked, and now he is using models that would have cost him in total, tens of thousands of pounds.

Sweet.

The Competitive Advantage Of Understanding

It is very important that we absorb the message above, not just from a business sense, from a social sense as well.

It is not uncommon for parents to attempt to incentivise their children by giving them pocket money. However we can see that doing this from a very young age, rarely has the desired effect on the child.

A seven year old has very little need for cash, as far as the child is concerned all its needs are met by its parents.

Add to that the child pretty much only ever leaves the house with his or her parents, thus the opportunity to spend their own cash is severely limited.

However we just carry on giving our little children pocket money, and then are confused when they still don’t tidy their bedrooms, pick up their socks, or whatever it is we really want them to do.

We can sometimes see positive results when we financially incentivise very young children, however that only happens when we attach the financial reward to something tangible that the child feels they actually need.

As an example; last year our daughter was on a sleepover at her friend’s house. It is one of those lovely sweet relationships, as she has known him since they were tiny babies, and they just love each other.

Often in such relationships, one child wants what the other has, so the boy in question has a Nintendo DS, something our daughter Matilda had mentioned to us in a not-so-casual manner, on many occasions.

We decided to take this opportunity to teach her about keeping her room tidy, or at the very least not deliberately making it as messy as humanly possible.

My wife and I told her that every morning if she made her bed we would give her 50p, and that she had a chance to increase that figure with random acts of responsibility and kindness throughout the day.

We told her that along with all the money Grandma and others gave her, we would save it up until she had enough money for a DS. Along with that we also told her that if she was a good little saver we would make up the last twenty or thirty pounds.

Matilda set about her mission with diligence and enthusiasm in equal measures. From time to time she would get out the pencil case she was saving the money in and would count it, and then ask how far she was from being able to afford her coveted Nintendo.

It took around six months but she did it, she got her DS and almost instantly became uninterested in money once more.

She stopped making her bed and her room reverted to the pre-Nintendo bomb site . . .

Self Aware Incentivisation

It is not just children who don’t see the value of purely financial incentives, most adults are the same, however few of them actually realise it.

For instance; people who play the lottery, it seems that it is a reasonable assumption that these people are incentivised by money to play.

However if this was truly the case, then we wouldn’t hear so many stories of lottery winners whom become penniless just a few years after scooping the jackpot.

If money really was their incentive, then they would keep hold of it once they had it.

The reason for this is that whilst accruing money for the sake of having money, might seem appealing when you don’t have any, once you have way more than you can spend, without a focal reason, money starts to lose its meaning.

We can look at two examples to illustrate our point; the first is a lottery winner that I don’t know personally, but know of.

This person was a stall holder on the Portobello market in West London. I believe it was the late ‘90s when he scooped around two million pounds on the UK National Lottery.

The man used this money to buy a huge truck in order to import flowers from Holland to the UK.

Apparently, this had been the man’s dream for quite some time, and today I still see his trucks (there are more than one now) driving around the place, which always gives me a little smile.

The other example is another UK lottery winner, Michael Carroll, the self-styled King of The Chavs. Michael was a refuse collector and had been so since leaving school at 16 with few qualifications.

Carroll scooped his fortune in 2002, winning around 9.7 million pounds.

However Michael’s story is very different, after buying a huge mansion in a posh part of town, he proceeded to paint the town red, white, blue and all the colours of the rainbow.

He held demolition derbies on his land, much to my delight, and his neighbour’s chagrin, and burned through his money in just a few years.

In an interview with an English newspaper, Carrol said that he didn’t regret being poor again, and had a laugh spending the money, eventually Michael went back to his old job of cleaning the streets, and later worked in a biscuit factory.

Know Thy Self

These stories are important because a lot of us want to be rich, we say things like; “wouldn’t it be nice to have no money worries.” Or; “I’d love to win a couple of million pounds.”

However often when we say these things to ourselves, we are just saying them because we believe that the money is the end, when in fact it is the means to an end.

Without a non-financial incentive to go with it, money is just meaningless, something Michael Carroll and many like him have found out once they actually become rich.

It is important that we use our goals as incentive, and make sure that they are non-financial, of course it may take money to achieve those goals, however the money becomes a functional necessity, rather than the whole raison d'être.

This is one of the major components of happiness as it keeps the mind occupied, which nourishes it and makes you feel good.

Money can’t buy you happiness, however it will allow you to hire an entire team to work on the problem

~ Cryptogee.

WHAT INCENTIVISES YOU? WHAT ARE YOUR GOALS AND DREAMS? DO YOU WANT TO BE RICH FOR THE SAKE OF IT, OR DO YOU HAVE A PURPOSE? AS EVER, LET ME KNOW BELOW!

Cryptogee