Coyote Blog describes in the interconnection between incentives and results:
“Here is Coyote’s first law of incentives: There are always incentives. If they are not embodied in written performance metrics, then there are unwritten ones that rule behaviors. And these unwritten incentives are generally a) very powerful and b) almost never aligned with the greater organization’s goals.”
Coyote goes on:
“But in general, government employees operate in a vacuum without any positive metrics — they can’t prove themselves by meeting or exceeding this or that goal because the goals have not been assigned and are not measured. So the default metric becomes this: to avoid screwing up.
Government employees operate in a web of hundreds, even thousands of procedural rules.”
This has been a theme of his for years, incentives drive behavior which is Psychology 101. I have long argued, back to my academic days, that the utility rational actor theory was not a predictive tool regarding individual behavior but rather an analytical tool to discern the underlying incentive structure in an organization.
The incentive structure for public employees is built around risk aversion, not just because of the lack of performance metrics, but also because if you’re a public employee the last thing you want is an elected official or a lawyered-up member of the public coming after you. You also never want to be “above the fold” of a media story.
There was a case last month that illustrates this. Trayvon White, a DC councilman was expelled for pressuring city agencies to extend city contracts in exchange for bribes. I am sure he expected that a call or two to the right employee would carry the weight of the word of God, or at least of Belphegor. What was left unsaid was how many other times DC politicians had interfered in the City’s contracting process without taking bribes.
The same problem of incentives infests the private sector as well. There’s an anecdote regarding J.P. Morgan and lawyers where the great financier was purported to have said, “Well, I don’t know as I want a lawyer to tell me what I cannot do. I hire him to tell me how to do what I want to do.” That was then and, my, how things have changed.
Certain parts of larger companies act as a regulatory framework that operates to keep the overall enterprise out of trouble. I’m thinking Legal and HR. In theory these are valuable sub-units because they could act in the way Morgan describes — enabling the larger organization to meet its goals — whether it’s by offering legal advice on various initiatives or by attracting and developing new talent.
However, this has not proved to be the case. In reality, both Legal and HR tend to act as regulatory outposts of various levels of government, dealing with everything from environmental policies to disparate impact. These units do not enable the company so much as act as compliance officers, restricting behavior. In turn, these departments not only gain power when government regulation increases, they have little incentive to ameliorate any problem if doing so could diminish their power. Incentives matter.
The best way of looking at DEI from a business perspective is that it is a self-imposed regulatory burden that deflects not only possible legal repercussions from your company but also bad PR. Marketing yourself as a DEI-compliant company by making donations to grifting non-profits is all part of the act: paying off shakedowns that are a cost of doing business. Instead of Fat Tony admiring what a nice business you have and it would be a shame, you instead have a bunch of grifting ideological mediocrities who smell money.
The fanciful notion that DEI added anything to the bottom line was quickly dispelled with the number of companies that have dropped their programs as soon as they thought they could get away with it. The fact that the Trump administration has been busy purging DEI programs within government was simply the starting gun.
Heritability, incentives, and randomness describe human behavior. We focus on the things that only affect behavior at the margins, like schools.
DEI was less “a self-imposed regulatory burden that deflects not only possible legal repercussions from your company but also bad PR” but more the fruition of HR’s entire purpose. DEI is just the obvious end-state of the Civil Rights Act of 1964 and its disparate impact standard, and Human Resources’s primary mission was shielding the company from that law.
Businesses that are not ideologically captured are still caught between disparate impact and actual equality. Which is one reason none of the big name corporations who have famously ‘ended DEI’ have actually done more than renamed their programs and stopped reporting to groups like Human Rights Watch. Another reason is that, of course, after decades of disparate impact hiring, many of these businesses are, in fact, ideologically captured.
Speaking of Incentives, here’s a story from X:
“Buyer saves $200K by moving suppliers
Move requires 400 engineering hours to implement
New product launch delayed, $3M in lost revenue”
https://x.com/joelmfg/status/1898786039994733034
Buyer gets a bonus
“Buyer gets a bonus”
X seems to be borked for me today but color me skeptical. If you’re in the type of business where changing suppliers requires that sort of qualification, and I have been. you’d better know that both the cost and time are part of the initial evaluation. On a late stage roll out, nobody changes anything and if they do, it’s because someone made a, likely career ending, mistake. This is the sort of thing that gets EVP’s fired and sent out the door with a bell tied around their neck.
Purchasing departments qualify vendors before they let contracts, and in businesses like aerospace, that can take months on something as seemingly simple as a metal cleaner.
If that story really happened, that company has lots worse problems than a stupid buyer that can’t follow specs.
At the same time, I’ve never been involved in or knew about any sort of incentive program where some of the incentivees didn’t spend much more effort gaming the system than doing real work. You get what you pay for.
Incentives for government work are going to be a challenge, since all governments produce is process, that’s what you’re going to get. Internal incentives aren’t the only incentives. The NYFD is embroiled in scandal where chiefs of the inspection department appear to have been taking “gifts” so that inspections would happen in this century.
https://nypost.com/2024/02/15/us-news/fbi-raids-fdny-headquarters-homes-of-fire-chiefs/
Two thoughts:
First, government as process. Public sector has a problem and that is consistency across diverse populations. Part of the consistency is that it has to formalize systems and procedures and make them explicit – not rely on intuition. What does “fair” and “equal” mean?
From my times at retailers, there was the same problem and most of our customer problems came from 1 to 3% of those which sociopathic. However I could instruct my front-line managers on ways of dealing with them. However the moment I do that in a public environment, with an emphasis on record keeping/retention I open up myself to problems. I could take a return in a retail environment and pretend it was complete because I knew the particular customer was a jerk and it wasn’t worth my time to fight it but I couldn’t do that in a public sector – “customer-facing” position like permitting or DMV because then I would be open to charges of favoritism.
I’s not the actual practice that is the problem but the time/effort/focus on avoiding the perception of favoritism that starts government work on the slow road to hell. Like a retail operation, the system is designed to avoid the 1 to 3% wrecking everything but unlike retail where everybody understands implicitly that the squeaky wheel gets the grease in government you need process and everybody suffers. Over time you get the incentive structure driving the behavior to the levels that Coyote Blog. mention – think of a Second Law of Thermodynamics of organizations – or if you like an evolutionary theory of orgs
Boobah makes a good point that DEI is an extension of prior HR…. and I despise HR. DEI was present before 2020 by those companies which were ideologically captured, but with all companies 2020 and the Summer of Floyd simply let the demons out
It’s the ability of companies to adapt to a regulatory environment that is a mark of “competitiveness.” A larger company simply has more resources and design margin to take on something like DEI or environmental compliance and pay the “tax” that anti-entrepreneurial policies bring about. It’s also a mark of competitiveness of how fast a company can shed such restrictions when the pressure comes off.
DEI is only sustainable when all companies in an industry – whether domestic or globally – abide by it When all companies “are in irons” (to use an old sailing term) everybody is equal… the company that can escape when the pressure comes off gains advantage
A term we don’t see much in the US but was prevalent several decades back in terms of European conservatism was the term “corporatism” which is that companies operated in certain extensions of government policy and norms. Not quite fascism, but restrictive,
As to government employees (ie “bureaucrats”) I suggest James Q. Wilson’s “Bureaucracy” as the definitive treatment. Wilson was the Harvard political scientist who proposed the “broken window effect” that Giuliani used to clean up NYC.
My major takeaway from the book is that a bureaucrat’s most fearsome enemy is not a citizen or an elected official but another bureaucrat encroaching on one’s turf.
In my industry, nuclear power, we saw that when the US NRC had the most trouble with TVA of all their licensees.
Organizations that ignore selective staffing of HR run the risk of losing both the ‘protective function’ of compliance with regulation, but also the future success based on the ability of HR to choose the ‘right people’ to staff the organization.
I believe the Welch process of firing 20% annually(if I have it correct) reflected on the inability of his HR to effectively choose good productive employees. If HR is doing its job, Welch would have had 100% cream of the crop and would not have wanted to let any of that talent leave.
HR can make or break a company. Period. IMO
I have worked for companies where the overemphasis was on reducing attrition. i can understand the idea – it’s expensive to hire and train people and also alot of poor performance is due to bad management.
There are alot of problems with that approach. The first it assumes a level of expertise on HR that can make the right hire every time. The second is that it demphasizes the rule of company culture. It doesn’t take many people, either incompetent or toxic, to destroy a culture. The example I sometimes used was if you piss in a 1,000 gallon pool do you have drinkable urine or undrinkable water?
It doesn’t take much. I just finished a conversation with a former employee of mine who mentioned the toxic nature of a certain supervisor, basically this person was pulling down the morale of half the building. A group of people even wrote corporate and the offending person was merely transferred… I’m guessing because she was a favored demographic.
A few years ago at the same company I made the case along the lines of what Tommy mentioned re: Jack Welch – getting rid of people. I used the term “pruning” I used the example of the NFL draft. Enormous resources and attention are poured into making the right picks but many of them don’t pan out. That’s just the nature of the beast. The proper perspective is what is not to manage costs but to find the most cost-efficient way of getting the best team and if that means acknowledging we “drafted” the wrong person and need to cut them then so be it.
HR is driven by several metrics which are often only loosely related tot he business. Diversity hiring numbers (still), retention, complaints, morale. Things that can have numbers attached to them regardless of those numbers have any validity
HR should not be making hiring decisions (except possibly for some low-level jobs and cases where a lot of recent graduates are being brought on at the same time)…the decision should always be made by the manager to whom the person reports and for his work will be responsible. That manager should certainly consult the advice of an HR person and sometimes of those with whom the new hire would be working…and sometimes of his next-level manager…but it should be *his* decision.
At Amazon, there is an elite employee known as the bar raiser. They are brought in at the last interview and decide whether the prospective hire will “raise the bar” for the unit. If he decides not, the person doesn’t get hired – he has the veto
The problem in many companies is not that HR actually makes the decision to hire a person (de jure) but that the system, in its various feedback loops as an iterative game by giving HR veto power essentially makes them the hiring authority de facto.
This is an evolving system where power consolidates over time
If you know and I know you know that I have the final say so over who is hired by use of a veto, then I have power even if I never exercise it. You will adapt your choice so that it will meet my specifications. That’s the essence of DEI and diversity hiring programs,
Sometimes the message is delivered a little more directly as when managers are brought in for a diversity training seminar and you know what the game is going to be, It could simply be after training you have an HR partner who participates on your hiring team
One of the early tells of corporate BS is when someone is told that they own the business, good old Tom Peters talk. They are then told in so many words that they don’t have true control over who they hire