Question · Organization
How should I structure incentives?
The Short Answer
Align individual incentives with organizational outcomes through skin in the game. Those who make decisions should bear the consequences. But beware of metrics that can be gamed - good incentive systems measure outcomes, not activities, and include mechanisms to detect gaming.
Biological Insight
Evolution is the original incentive system - organisms that behave in fitness-enhancing ways reproduce; those that don't, don't. The system works because there's no way to game it; you can't trick evolution with activity metrics. Organizational incentives fail when they can be gamed - when the metric diverges from the actual outcome you care about.
Key Questions to Ask Yourself
- What behavior does this incentive actually reward (not what you intend it to reward)?
- How could someone game this metric without producing the outcome you want?
- Do those being measured have skin in the actual outcome?
- Are you measuring outcomes or activities?
- What are the second-order effects of this incentive?
Common Mistakes
- Measuring activities instead of outcomes
- Creating incentives that can be gamed
- Rewarding individual performance in ways that hurt team outcomes
- Short-term incentives that sacrifice long-term health
- Not updating incentives as the organization and environment change