Don’t Believe the Hype
Incentives, or “It’s a great time to invest”
If you haven’t seen the SNL skit “Reliable Investments” with Alec Baldwin, you should check it out here. It is an oldie but a goodie, and an excellent example of misalignment of incentives.
I was reminded of it recently while talking to a real estate agent. Before the conversation, my wife and I were only mildly considering a move at some point in the next few years. However, by the end of the conversation, we were temporarily in a trance and convinced we could move into the house of our dreams almost immediately.
By returning to the cold hard facts of the family budget, we could awaken ourselves from our stupor. Still, upon reflection, the experience provided an interesting observation regarding incentives. In the case of the real estate agent, his or her only incentive is to make deals. He has little concern for our future financial wherewithal - he is incentivized to get homes bought and sold, and the higher the valuation, the better. Now I’m not saying that the agent had ill intent during our brief conversation - only that the incentives in place would make it unwise for me to follow his lead without validating his opinion against the specific facts of our situation. Like the stockbroker in the video above, he has much more to gain from a quick sale at a high valuation than from a more patient and thoughtful approach.
Unfortunately, in many small businesses, this same problem of misaligned incentives resulting in faulty decision-making is too common, and the facts are much more challenging to validate. Even small asset purchases, such as when to replace a particular tool, if not viewed through an owner’s lens, can be dictated more by the user’s disdain for its features and less by its remaining useful life. As a small organization grows into a mid-size organization, it is no longer possible for ownership to validate every capital expenditure personally. This is why it is so important to have aligned incentives. Suppose the employee using the tool is compensated in accordance with his ability to make that tool last. In that case, he will be much more likely to look past its age or lack of superficial features and judge it instead by its ability to efficiently get the job done.
As important as incentives are, they are not the end-all-be-all of decision-making. I would rather have a company with an excellent culture of teamwork and winning with poorly drafted incentives than a culture of selfishness and expertly designed incentive structures. Lest we forget the age-old rule – “culture eats strategy for breakfast.” That said, incentives remain a vitally important part of an organizational structure, especially during rapid growth and expeditious hiring, it is essential to build a good culture and keep incentives aligned from ownership to the front-line employee.
One of our foremost goals at NBH is to ensure that there is alignment of incentives between ownership and management and with each employee on the front-line, talking to customers, maintaining equipment, and getting the job done. This ensures that both the decision-makers and those feeding them vital information are incentivized to make good and well-informed decisions.