The Power and Pitfalls of Incentives: A Personal Story

It’s crucial to put real thought and planning into designing incentives because there can be unintended consequences.

*If you would rather watch than read then enjoy the video below.

Today, I want to talk a little bit about incentives. Over a decade ago, when I was at HubSpot as one of the inbound marketing consultants, we had a metric to measure customer success called CHI—Customer Happiness Index. This metric looked at various usage elements of the product and tried to sum them up into one number on a scale of zero to a hundred.

As a consultant, you had eight calls over three months to get customers onboarded, up to speed, and then hand them off. Our incentive was to get 80% of those customers above 80 CHI. Understanding the algorithm and how to get customers over 80 CHI, I was one of the first consultants to achieve 100% of my customers over 80 CHI on a weekly and monthly basis. Through that success, I was promoted to manager of the consulting team.

As a manager, I taught all my consultants how to game the system. I showed them how to optimize their efforts to maximize CHI and pass customers on while hitting the 80% plus target, as they were incentivized to do.

However, we later learned that the highest correlation to customer retention and long-term satisfaction was simply usage. At the time, we didn’t know that and were still figuring things out.

The Lesson in Incentives

Why do I tell this story? It demonstrates the powerful impact of incentives. Charlie Munger, Warren Buffett’s famous right-hand man, had a quote that goes,

“Show me the incentive and I will show you the outcome.”

There are a few key takeaways from this quote and my story:

1. Behavior is Driven by Incentives:

   1. I was incentivized to get customers over 80 CHI, so I figured out ways to achieve that.

   2. People are self-interested and aim to maximize their personal gain. I wanted to avoid trouble, keep my job, and earn bonuses, so I did whatever was necessary to meet the target.

2. Unintended Consequences:

   1. When incentives are not aligned with long-term goals, people will take shortcuts, causing problems.

   2. Focusing on short-term gains can be at the expense of long-term success. I optimized for CHI, but missed the bigger picture of actual customer usage and satisfaction.

3. Designing Effective Incentives:

   1. When designing incentives, consider all the ways people might exploit them.

   2. Think about ethical considerations and potential unintended consequences. For instance, wanting to sell more cars might lead to increased greenhouse emissions. Switching to electric cars could mean more mining for rare earth metals, creating new problems.

Aligning Incentives with Positive Outcomes

Properly aligned incentives can significantly boost motivation and performance, as shown in my example. Here are some important points to consider when aligning incentives:

1. Explain “the Why”:

   1. Ensure people understand the reasons behind the incentives.

2. Align Incentives with Customer Positive Outcomes:

   1. If employees’ incentives are aligned with benefits for customers, everyone wins.

It’s crucial to put real thought and planning into designing incentives because there can be unintended consequences. Once you understand this concept, it’s hard to forget. How many times have you said, “Yep, I could have told you that would happen”?

Share Your Stories

Do you have any stories about incentives leading to crazy unintended consequences? I’d love to hear them! Share your experiences and let’s learn from each other.

Have a great day!