You often see boothers asking questions in online groups like “what do you pay your attendants? ” or “do you offer event planners kickbacks for referrals? “.
But there doesn’t seem to be equal thought put into what behaviors you are actually encouraging with your incentives.
As a recent personal example, my good friend is a contractor and we decided to partner on flipping homes. I wanted to make sure that he was compensated fairly for doing the rehab work. It was suggested that he should just get a % fee of the total construction budget.
But I said no.
Because if his compensation is based on the total construction cost, his incentive is to spend more money on construction. It seems so obvious to me yet this is the default way real estate developers are compensated.
This concept applies to all areas of life, not just business.
The Cobra Effect
This entire genre of “incentives that had unintended consequences” is known as “The Cobra Effect”.
Many years ago, villagers in India were paid a bounty to capture cobras. The goal was to reduce the number of cobras as they became a public safety hazard.
Unfortunately, people actually started breeding cobras so they could kill them and collect rewards.
By trying to encourage behavior that reduced the number of cobras… they inadvertently increased the number of cobras.
I want to share a few examples below of how incentives that were crafted with the right intentions (and seemed to make sense at first glance), actually encouraged the opposite behavior.
For years, Domino’s Pizza had this famous promotion: delivery within 30 mins OR the pizza was FREE.
Delivery drivers often sped to make the deadline and caused a number of accidents.
One crash victim sued Domino’s and was awarded $79m. The chain shut the promotion down.
Trying to Get Parents To Pick Up Their Kids On Time
A classic example from the book “Freakanomics“:
An after-school center started fining parents that picked their kids up too late.
More parents started picking their kids up late because the fine was now interpreted as a “fee for babysitting services”.
Trying to Reduce Pollution
In Athens (late 80s), the government tried to limit pollution by having odd-numbered and even-numbered license plates drive on alternating days.
Result: people bought a second (lower quality + worse emission) car as a backup. Streets stayed clogged, pollution got worse.
Trying to Reduce Issues With Drunk Fans
Alcohol bans at football games led to increased intoxication problems because fans were getting really really drunk before even entering the stadium.
Trying to Protect Strippers
In Alberta, Canada, patrons of strip clubs were required to keep a 2m buffer from dancers. However, it’s difficult to throw paper currency that far accurately. So people started throwing metal $1/$2 coins at the strippers:
“The goal was to protect the safety & dignity of dancers but they were reduced to fleshy coin targets”
Trying to Save Money
Windsor, Ontario switched to LED lights for traffic signals to save money on electricity.
LED’s burn cool so — in the winter — snow and ice doesn’t melt off like it does on electric lights.
This led to car accidents and additional expenses for work crews to clean the lights.
Trying To Prevent Ships From Sinking
After the sinking of the Titanic, the US government made a law requiring that boats have lifeboats for 75% of passengers.
Legislators warned that certain vessels couldn’t handle all the extra weight.
One boat (SS Eastland) flipped due to all the extra weight in the Chicago River, killing 850 people.
As Warren Buffett’s partner, the great Charlie Munger says…
“Show me the incentive and I will show you the outcome.“
I don’t believe that entrepreneurs put enough thought into crafting great incentives.
But how does this apply to boothers and your business?
Let’s think about our initial questions:
How do you compensate your attendees?
Well, if you pay them hourly… are you inadvertently encouraging them to take their sweet time and work slowly?
If you decide to instead pay them a flat rate per event… are you inadvertently encouraging them to work as quickly as possible and rush to the event at the last possible second?
What about the other question of offering kickbacks to venues or event planners?
Are you giving them an incentive to send you ALL their business?
Or are you simply encouraging them to line up commission deals with several boothers, so that they can send their clients to all of them and not care who they pick? Because they get their cut either way.
Hmm… maybe the incentives are not as aligned as you may think.
Or what if you give your employees a bonus for booking new events while working events… are you encouraging them to be overly pushy and salesy instead of focusing on creating a great experience at the event at hand?
“Show me the incentive and I will show you the outcome.”
How I have been handling things lately in my businesses is to focus on getting team members to feel like co-owners, not employees.
This often results in me paying people more but gets them to have more of a vested interest in the overall success of the company.
How may that look?
It totally depends on the circumstances. But the first step is for you as the owner to reflect deeply on the behaviors you want to encourage, as well as the behaviors you want to discourage.
Work backwards from there.
For example, with my contractor partner in the flipping business, our main goal was to maximize profitability. A lot of factors go into that, for example; the home has to be high enough quality to command top dollar on the market, the home has to be completed quickly, etc.
So we agreed on what a fair flat rate price would be for a contractor to do the renovation. But then we also built in incentives that increased his compensation based on the profits of the flip.
This forced the contractor to analyze every decision through the lens of our most important goal: profitability.
He couldn’t go cheap because that would result in a lower sale price, but he also couldn’t just go high end on every item because it could result in wasting money on unnecessary materials.
In other words… he started thinking like an owner.
He felt comfortable because he was getting paid a guaranteed minimum for the work… but he was incentivized to maximize profits without cutting corners.
When he was deciding what materials to use in the bathroom, or how much to spend on the kitchen renovations… his north star was profitability.
“Will splurging on these kitchen cabinets make a big enough difference on sales price?”
“Is it worth it to re-do the siding of the home?”
He started asking himself the same questions I’d be asking when making these decisions.
And the more profit… the bigger his reward.
But the bigger his reward… the bigger my reward.
Proper incentive alignment.
As a counter example, my friends that also flip homes constantly complain about their contractors.
But when I listen to how they work with their contractor partner, it’s obvious to me what the issue is.
They bid the job to various contractors and choose one of the most affordable options. Then they try and negotiate the price even lower.
But now, they’ve made the project less appealing to their contractor partner.
And what inevitably happens in almost every case is that the contractor ends up dragging his feet on this project.
Contractors are constantly juggling multiple projects. By trying to make the flip more profitable for yourself, you reduce the incentive for your contractor. So he focuses on his other more profitable jobs over yours.
Can you blame him?
I sure don’t.
I hope these examples touched a nerve with you and get you to think about how you can properly align incentives in your business.