Incentives Matter

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 had long argued, back to my academic days, that the utility rational actor theory was not as a predictive tool regarding behavior but rather as an analytical tool to discern the underlying incentive structure in an organization.

The incentive structure for public employees is built around risk aversion and not just because of the lack of performance metrics but also because 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 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 operate 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 to offer legal advice on various initiatives or attract and develop new talent.

However this has not proved to be the case and in fact 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 acting as compliance officers restricting behavior. In turn these departments not only gain power with increased regulation, but have little incentive to ameliorate the problem as that would 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 designed not only to deflect possible legal repercussions but also bad PR. Marketing yourself as a DEI-compliant company with some donations to various grifting non-profits is all part of the act, simply shakedowns that were the cost of doing business. Instead of Fat Tony admiring what 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 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.