Lessons From a Rat Massacre

Wordpress Pic - Perverse IncentivesIn 1902 the governors of the French Indochinese colony of Hanoi were facing a problem with rats overrunning their buildings. Their initial response seemed simple and ingenious; they introduced a one-cent bounty on each rat killed. Each bounty-hunter only needed to show a rattail as evidence of the kill. At first the bounty was successful with thousands of tails being brought in to municipal offices. But after an initial drop in the rat population officials soon noticed more rats running around than ever, many without tails. They discovered that resourceful locals were cutting off the tails for the penny but leaving the rats alive to breed and produce offspring with more lucrative tails. Some citizens were even breeding their own rats, just for the tails. Not exactly the performance the governors were trying to incent.

The “Hanoi Rat Massacre” is a famous example of what has come to be termed “perverse incentives” where short-sighted incentives backfire and produce a result the opposite of what was intended. In the world of human performance more Hanoi Rat Massacres abound than we would like to admit. Consider these examples of perverse incentives:

 

  • A work crew finishes building a new park and playground a month ahead of schedule so they are laid off without pay four weeks earlier than they expected. The town lauds the cost savings of the early finish. Later that year a new crew is hired to build another park and are asked if they can again come in ahead of schedule. If word spread about the last layoff how likely is the new crew to finish the job early?

 

  • Mary surpasses all other clerks in her department in the volume and the quality of work she completes. As a result her manager gives her extra work, more than her peers are given. How diligently will Mary work next time around? How effective is more work as an incentive for doing a good job?

 

  • At a town-hall style meeting, the CEO of a public company exhorts all the employees to go the extra mile to provide utmost value to the company’s shareholders. Senior managers of the company get stock grants (thus are themselves shareholders) but rank-and-file employees are not. How likely are the non-executives to go that extra mile?

 

  • Tim has the best sales record so is given new accounts that have historically been the hardest for sales penetration. How incented is Tim to make great sales with these new accounts especially if his commission goes down? How likely is he to continue to focus on his old, successful accounts and pay only lip service to the new ones?

 

  • When a company adopts lean six sigma as a means for process improvement and operational efficiency, Frank offers to share data with a consultant and allow him to take his team’s time to map out the current and improved processes. The analysis shows that improved processes can eliminate the need for two full-time equivalents so Frank is forced to lose two workers. How likely is he (or any other manager who watched this) to volunteer for the next lean six sigma project?

 

  • Amid rumors of layoffs a well-meaning manager offers training to employees to help them be more marketable in the job market. The manager eventually lays off one graduate of the training, rationalizing that he should have less trouble than others in finding a new job. How likely are more people to sign up for the training?

 

  • A public radio station, during its fundraising pledge drives, wants people to contribute early in the drive thus allowing them to end it early when a total dollar goal has been reached. As the pledge drive draws to a close and the station gets more desperate, they begin to add prize drawings for which that day’s pledgers are eligible. Crafty pledgers have learned that it’s better not to pledge early but instead wait until later in the pledge drive when drawings emerge. Thus the radio station’s perverse incentive elicits behavior exactly the opposite from what it wants, i.e., early pledgers.

 

Incentive-planning is a science and an art. Well-done they can manage themselves and promote exactly the performance you want. It’s key to understand your audience, know what incents them, and to put yourself in their shoes. Just because you like to golf don’t assume a golf outing is going to be a great incentive for your whole department. To someone who spent nights and weekends with a project team working on getting a product out the door on time, the thought of a thank-you department dinner might be the last thing they want; they may see it as just one more night away from their family. Being brought up on stage to receive a certificate might be downright horrifying for someone who might be deserving but more shy than most.

Workers are unique and have varying desires, responding to different incentives. Good managers will in fact put the employees in charge of orchestrating the incentives for themselves. A team leader can find an opinion leader, someone on the floor who has general credibility with the team, and have that person select the incentive, be it gift certificates, an afternoon of miniature golf or lunch at a local microbrewery. She or he is certainly going to choose something that is genuine and will often pitch in on the planning.

What can be worse than no incentives are perverse incentives. There might be people in your organization right now focusing on gathering rattails rather than solving rat problems.

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© 2013 The Iago Group LLC

About Author: David E. Wile

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