28 thoughts on “Do incentives work?

  1. I have never been able to figure out why you have to pay extra just to get people to do their job.

    I work for a large corporation that recently lost its American executives. (You can probably guess which one)Many people were put on AWA’s where their income is directly proportional to the number of jobs they do. Those that didn’t sign up to this arrangement were labeled bludgers.

    Work volume is now escalating due to the amount of shoddy repair work done by those on AWA’s so they could maximize their income. It will cost the corporation millions to fix.

  2. Has capitalism become so demonized that no one knows what it means anymore!? “that’s not how free markets work” in reference to incentives not working.

    He later goes on to endorse and specifically emphasise Autonomy…

  3. I’m doing a management course at uni now as part of my degree. This is a really interesting video 🙂 It doesn’t fly in the face of what I’m being taught, but it definitely provides an interesting supplement to it

  4. Steve – it supplements rather than contradicts most of what I have read in relation to management theory.

    Waistless – Correct, next to nobody knows what capitalism means. However that has probably always been the case. I think he picked his terms well enough given he was communicating with a broad audience.

  5. GrannyAnny – Telstra may be badly managed but it seems to me that the entire telco industry in Australia suffers from this disease. The fact that we can still make phone calls is testament to the quality of the technology.

  6. Steve, you need to put a stronger piece of string between the two polystyrene cups, and make sure both you and the person you’re calling keep the string pulled tight throughout the call. My 4yr old uses this technique and we don’t have many dropped calls, and it was working fine when we lived in Canberra. Or you could just buy one of those new fandangled mobile phones and get a carrier that has good reception in your area.

  7. Is he really saying anything new? Don’t think so.

    It’s not a great revelation that monetary incentives are the only things that work in getting the best out of people. In fact I was a little under-whelmed by that assertion.

  8. No, it’s nothing new, but it is a nice reminder. We’ve all heard of the micro-manager – he’s just saying don’t be one of those. Once you’ve got a good team you tell them what needs to be done, not how to do it. Creativity comes from letting people have control over themselves.

    Of course, this will be used as evidence by collectivist left-wing parasites to claim the best productivity is achieved by paying everyone high salaries regardless of their prior achievements or propensity to delivery, and not holding them responsible for their actions. But that hardly comes as a surprise.

  9. Actually I don’t think those doing the candle puzzle were unmotivated by the financial reward. It’s just that in that instance a performance based incentive had a negative effect on performance. If they were simply indifferent then it should have had zero impact. This example is quite different to saying that people are motivated by things besides money.

    What I think this implies is that for most jobs a fixed salary might be better in many instances than a KPI driven bonus scheme. You still need to pay the right salary to attract and retain people. And I think the bit about the power of granting people autonomy actually supports the libertarian worldview.

  10. I agree Terge. The autonomy thing supports the libertarian view.

    I also think he sort of stumbles on a market based compensation system too.

  11. Misssed this last bit.

    He’s also supporting to Wall Street Style compensation system which is low base salary and higher back end.

  12. What he is saying is right however. At most big companies all the low level employees get no bonuses or performance pay. And all the top level managers/execs do. Its all backwards.

    I know at my work I have to set targets for the performance pay, buts its impossible to define targets for tasks that you don’t know the solution to. So you create artificial ones and people spend the year meeting them, just because they were what was originally written, not because they do anything for the buisness. I would rather have the factory workers on the line getting bonuses based on performance, but the unions for some reason have people convinced that everyone should get equal pay. Buisness is wierd.

  13. I think what he says also explains why work-for-the-dole programs aren’t successful and how unconditional welfare with EMTRs is a better alternative.

    The Howard government in trying to make people less welfare dependent introduced a whole heap of if-then conditions that relied on extrinsic motivation. But most people on the dole already have the intrinsic motivation to get off it, they sometimes just need to autonomy to be able to do so.

    Getting off welfare and into work shouldn’t be a hassle. I think a citizen’s wage as a form of NIT along with removal of minimum wage laws and removal of welfare conditions would be a great way to see an increase in employment.

  14. Shem Bennett, “a citizen’s wage as a form of NIT along with removal of minimum wage laws and removal of welfare conditions would be a great way to see an increase in employment”, apart from a couple of things. There would be a lag, which would lead to a huge funding problem, and there would be a continuing cost from churning funds through the government even after it started to take effect. Eliminating those are among the main reasons I instead prefer the approach Professor Kim Swales of the University of Strathclyde and Nobel winner Professor Edmund S. Phelps worked on, applying offsets to employers’ tax bills, which I worked up into my submission to the Henry Tax Review described here.

  15. That’s pretty presumptuous noting that this will “always” happen.

    The LDP policy in the 2001-2007 Federal elections was for a NIT/labour market liberalisation (30/30 plan) and this was fully costed within a balanced budget and churning was reduced.

  16. Mark Hill, I have no doubt that once things had sorted themselves out a suitable Negative Income Tax would have less churning than the current system. But that was not the point I was making. Rather, even in the long term it would have more churning than the Swales approach (which has none, since no funds go through the government).

    Furthermore, a Negative Income Tax only promotes higher employment by allowing real wages to fall enough for more people to be priced into work; this takes time (the lag I mentioned), during which there are short term funding problems since nearly ten times as many people have to be covered as under the current system – and that might last seriously longer than politicians’ time horizon. I’m not saying the problems are insuperable – they aren’t – but that serious things have to be done to address them, and they might not work perfectly from the get go. However, the Swales approach engineers all that out, by being revenue neutral in the short term and budget neutral after that. Quite simply, the problems can be made to go away by using this approach.

  17. “Furthermore, a Negative Income Tax only promotes higher employment by allowing real wages to fall enough for more people to be priced into work”


  18. Mark Hill, what I told you was tautologously true, although for that reason it conceals a lot of what is going on.

    Just to make sure we aren’t talking about different things, that “real wage” does not include the Negative Income Tax but only what employers pay out. (Under the Swales approach, what counts is the marginal real wage, i.e. after the adjustments.)

    The tautology is, if real wages are at a certain level and there is not full employment, then by definition that level is higher than a market clearing wage. Contrariwise, if the market does clear, it is. Of course lots of other stuff happens on the way there as well, e.g. changes in real output – so that there is more “stuff” around to bid for employees and the market clearing wage changes, maybe rising, so that it is at a different level once the market has cleared than it originally was. But that is like the water level rising when a large ship is launched into a small lock; it still displaces its own weight of water even though it is at a higher level than its deck height above the original water line.

    So, full employment comes at a market clearing wage even though it also changes that wage. So what? It converges to a level, and policies that prevent reaching that wage prevent full employment. You must have that wage in those conditions, by definition; it’s just that that is a function of other things, not independent.

  19. Of course that is definitionally correct, but I don’t think you were being fair to the elimination of poverty traps, perhaps the best feature of the NIT/, 30/30 or even the Swales approach in the Australian context, which in themselves can create highly damaging generational poverty.

    I assume that you knew that. I think the removal of poverty traps is a big selling point, particularly to those whom might be swayed to such an approach, but who come from a more left wing background on economics. So I think it is worth pointing out.

  20. Well, I didn’t want to do a complete coverage of the entire topic just to clear up that “no”. That would need an essay, and as it was I provided a lot of detail. I did point out that there was more (“…although for that reason it conceals a lot of what is going on”).

    On poverty traps and related things (high marginal rates of whichever tax), that’s why ideally I would have preferred a different tax to GST as the carrying tax for the Swales approach like a tax on the use of commercial plant and premises, a variant of Land Tax (mentioned at the end of this). That is, that would tax on the basis of use in the sense of capacity rather than in the sense of production, capacity measured by comparisons with other taxpayers in a zone (I won’t go into further detail). But the GST is already in place, and I wouldn’t trust politicians to replace one tax with another rather than leaving both taxes.

  21. First of all, Incentives, perks, favors, pay raises or whatever, cannot make someone more capable of solving problems or improve someone’s I’Q. The Candle problem is similar to the type of question you would find on an I.Q. test and therefore the expectation for incentives to make someone be capable of solving the poorly phrased problem is ridiculous. Lastly, the candle problem is phrased unfairly based on the solution they show. The test should have been phrased the following way to be fair:
    “Arrange the items on the table in such a way, that the candle is up off the table and when the candle is lit, it doesn’t drip down on the table.”
    To ask people to attach the candle to the wall is not phrased fairly, because in the solution, the candle is still not attached to the wall, but rather an extension to the wall, which was not in the phasing of the original test. This video confirms that these supposedly smart people don’t even understand the limitations of incentives or how to use them and they sure as heck don’t know how to create a fair test that is worded correctly.

  22. Incentives cannot make someone smarter. Incentives are best used to increase someone’s willingness to maybe try harder, or even encourage or discourage certain behaviors, within limits. Incentives simply cannot make someone’s problem solving capabilities rise above their aptitude. Incentives are only as effective as the skill level of the people trying to use them. If people don’t understand the limitations of incentives and what they are intended to do, they will inevitably misuse them with unrealistic expectations.

  23. I am sure that the incentive of a good job got me to go through university, and through hard work, I became a person with a higher IQ.

    “Incentives cannot make someone smarter.”

    Not directly. Indirectly, yes.

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