Unintended Impacts of Incentives

In my career, I have found that incentives almost always work.  I have also found that they often work with unintended consequence.   We can see it in our lives as the federal government needed to bail out financial institutions where executives were rewarded for taking profound risk with significant leverage, or on the ground where mortgage originators were rewarded for volume with no adjustment for default risk.  We can also see it in the Real Estate and Multi-Family marketing world, where the goals set up by the biggest players in the industry ultimately can have some unintended consequences.  First, a couple of examples from my life…

I started my career as a consultant in a firm where the early promotion from “Senior” to “Manager” was a hotly competed race.  One of the key measures that was always reviewed was productivity.  Were you able to deliver your projects and your work on-time and on budget.  As a senior, you knew your billing rate and its impact on budget – you also knew that extra work would help you make your schedule goals.  The productivity incentive had many Seniors “eating hours”.  In other words, they would under report their time in order to appear to be more efficient.  In a world where the consultancy was paid based on billable hours, this efficiency incentive only hurt profitability.  We were essentially giving our time away for free to our clients.  So, probably 2 unintended consequences – the consultancy was for the short term less profitable, but our clients thought we were superstars, working so hard for their benefit.

Later in life I instituted a completely revised commission structure for one of the countries largest leisure travel agencies.  The premise was that agents should make money when we make money – the more profit they could generate for us, the larger their commissions should be.  It took a lot of work to figure out the relative cost of each sale (cruises are very long transactions, rental cars are very short transactions, hotels can be long or short depending on the market and the selection…).  We knew our revenue for each transaction.  We implemented the plan and got an immediate profit bump – and then got a series of strange complaints.  Some customers were either having their calls mysteriously “dropped” or “transferred”.  It turned out that Delta was not paying any commission to travel agencies at the time, so we were not paying any incentive to our agents for booking Delta flights.  Agents did the math – they could waste 12 – 15 minutes booking a family on Delta or just “drop” the call in hopes to get a package with Continental flights to sell.  They behaved as incented but not as intended.

There is an incentive in the Multi-Family industry that is driving behavior but may have unintended consequence.   The trend is around lead attribution.  From what I can tell, many of our largest customers have developed, acquired or rented lead and lease attribution systems.  By far, the most popular lease attribution method is “first gets the credit”.  So, the incentive to the media players is “be first, get more business”.   Here are some of the potential unintended consequences of this incentive:

  • Multi-Send Leads – If first counts, then I should try to be first with everyone.  When I get a lead I should send it to as many of my advertisers as is allowed.  If that person rents from anyone, I can get the lease credit.  Good for the media provider, bad for the advertisers.  This “lead multiplication” behavior just drives up system wide cost as more companies are chasing poor quality leads.
  • Limit Information – If I want to be first, I want people to need to call the advertiser as early as possible in their shopping cycle.  An easy way to do that is to drop key pieces of information from the ad (let’s say price) and replace it with a bigger phone number.   You will likely get more calls, earlier in the process – giving credit to the media player – but not necessarily generating more leads.
  • Be (a little) Deceptive – If you click on a button that says “check pricing” and your information is processed as a lead you may have just been tricked.  You thought you were about to get information and instead you are now a lead.  Helps the media player to be first, but is not a high quality lead.

You can see how once the rules of the system are defined and the goal is identified, people will game the system.  Should “first” be the attribution method?  Take the case of someone who is actively shopping for an apartment and looks both in the Newspaper and on Craigslist.  Let’s say that they looked in the newspaper first but also registered through a link from CL.  Just to make it easy, assume that was the only lead from the newspaper ad and the only lead from the craigslist post.  The newspaper ad cost $500 and the Craigslist post cost was under $1.  Should you really attribute the lease to the newspaper?  Wouldn’t you want to attribute the lead to the lowest cost source of that lead – even if that source was dead last in the foot race?

We just reworked our incentives at NCI for the By Design Publishing sales team.  I wonder what unexpected results we will get for our troubles there…

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One response to “Unintended Impacts of Incentives

  1. Todd — Fascinating look at underexplored world of incentives. Ultimately, the winning design is whatever we need to do to build the team…hopefully, it isn’t always related to cash in the pocket (!)

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