On Incentives and The Love of Large Machines

[danieldwilliam]

Today’s foray into the Ten Pillars of Economic Wisdom is my response to the second of Henderson’s Pillars, Incentives Matter, Incentives  Affect Behaviour.

I used to work for a power company. We owned a Combined Cycle Gas Turbine plant. It was an engineering marvel and a thing of great beauty. It operated at thousands of degrees of heat. The ceramic tiles that covered the inside of the gas turbine were the same as those on the  Space Shuttle. The blades of the turbine were cast and machined as pure crystals of alloyed steel to tolerances of mind exploding fineness.

It cost about $100m to build and each of the hundreds of turbine blades was upwards of $10k.  Having it not running might cost us £1m a day in lost revenue.

The guys who built and maintained the kit were highly skilled, very dedicated, almost obsessive in their work. They would work for days on end trying to fix a damaged component.  If you ever want to see a love poem made flesh and blood go and watch some engineers fix a gas turbine. Some of them earned more than our CEO per hour, too. Rather, if the machine started working again on time, every time, they earned more than our CEO.

Every so often during a maintenance cycle we’d discover that someone had tried to sabotage the turbine.  Typically, they would leave an oily rag in the one of the vents where the gas entered the combustion chamber. I’ve seen what happens when a small piece of debris gets loose inside one of these machines. It’s heart breaking. Heart breaking and expensive.

So why would a maintenance crew so devoted and so well paid sabotage their own work?  Incentives. Incentives matter.

Not everyone working on the site was directly employed by our firm or by the primary contractor.  There were guys there to do scaffolding, guys there doing bits of non-critical welding, to be stand-by rescue ambulance technicians, guys there to clean the cabins where the maintenance crew ate and slept, car park attendants.  All of these guys were paid by the day.  They were paid to help fix the machine, but they weren’t paid if the machine was fixed.  The single best thing they could to increase their take home pay was break the machine again.

Putting it another way. Some of the guys were on the inside. If our team did well, they did well personally.  Some of the guys were on the outside.  If we did badly, they did well.

We had two choices.  We could become obsessive about security. We could get guys who were on the inside to police the guys who were on the outside. But they are expensive guys to have as policemen.  Policing people creates a climate of suspicion and disunity and, if you’re the kind of person who is going to be making and fixing power stations you don’t want to work with people who you don’t trust and who don’t trust you. That’s a disincentive to come and work for us, and we want only the best and most dedicated people.

So, our other choice?  Turn the outside guys into insiders.  We offered our secondary contractors on-time completion bonuses.  We made it clear that some of that bonus should go directly into the pockets of the folk working on the plant.  We explained that if our secondary contractors did a good job we would hire them again to work on this power station and we’d hire them to work on our other power stations. We created a common health and safety culture (using a series of public incentives ) and made sure that we were personally looking after the well-being of every person on site.

It took years. It was hard work. It was difficult negotiating the fine details of on-the-job contract performance with people you had come to consider over many years as insiders. But we were incentivised.  If it worked we didn’t have to worry about our billion dollar fleet of power stations being sabotaged. We were incentivised. If it worked we all got five or six figure bonuses. If it worked, we all got to go to the pub and congratulate ourselves on a job well done. 

So we shaped ourselves to be the kind of people, the kind of organisation that could and would build long-term relationships with our peripheral contractors. It cost us millions, but when our power station really, really broke it saved the whole company. Saved my job.

So, incentives matter. Incentives affected my behaviour.

What lessons does the student or amateur economic anthropologist draw from the second pillar of economic wisdom.

If you don’t understand why people are behaving in a strange way have a close look at the pay-offs. Be alert to the way incentives are working. How they actually play out. Who gets money (or other goodies) put into their pocket for doing what, exactly. What they are actually incentivising. Look at not just the cash but the pride and respect. Look at not just the hard incentives but how the incentives affect risks and contingencies.

We could have offered all the cabin cleaners 10% more money. All this would have done was increase their incentive to break things by 10%. We might have ended up with a group of more honest contractors, or we might have ended up with a group of contractors more cunningly able to break things undetected.

People might have bounded rationality but they do know what side of the bread the butter’s on and a lot of economic knowledge is tacit. The individual actor doesn’t need to know why a particular incentive drives their behaviour, they just need to know that’s how we do things round here.

Incentives matter. Watch the Money. Who benefits? And for What. If you don't understand behaviour, try looking at how the incentives work

Comments

[f4f3.livejournal.com]

This verges on two things I know about - people who work for power companies, and people who work as contractors. When I say contractors, I mean everything from temps through casual labour (if there is any such thing anymore) to £5k a day gurus. All of those people of whom it's been said "If you can't be part of the solution, you can make a lot of money from the fuck-ups).

I came into the power industry after the end of public ownership, and just before the supply business became deregulated. In fact, deregulating the market was why I was there. Looking back, I'm not madly proud of it, but I did make, um, lots of money out of contracting to ScottishPower for almost 10 years.

There was one incentive for doing that work. Money, I've read for years and years, I was told at my only careers lecture more than 30 years ago, I was told by my plutocratic boss 3 months ago, that people are not incentivised by money.

I can honestly say that I felt 30 years ago, and I felt 3 months ago, that that is the biggest load of cock I've ever heard. Money is why we do these things, the rest is rationalisation.

Hmm. Yes. I think that was my point...

[danieldwilliam.livejournal.com]

I’m surprised and dismayed by the cynicism of this statement. Especially from you, as I usually consider you to be more optimistic about human nature than most.

If that’s how you genuinly feel about work than I’m a sadder man now than I was this morning.

[f4f3.livejournal.com]

I really don't see this as cynical, just a statement of the obvious for the majority of people who need to work. And I don't see what it has to do with human nature - we are not our jobs, and within the workplace we behave with all the diversity and glory that makes us human.

I'm puzzled that this type of rationality would make you sad.

[danieldwilliam.livejournal.com]

I am not sure that it is a statement of the obvious that the majority of people are solely motivated by money when they approach their work.

I think that is what you said.

[f4f3.livejournal.com]

I think my statement was that money is the motivation, and that the rest is rationalistation, for the majority of people. I'd quantify that by asking people if they would do the job they were in if they didn't need the money. If they say "Yes" than obviously they aren't working for the money.

I think I stand by that general position, but I'm prepared to accept that this is obvious to me, but not necessarily to everyone else. There are a lot of assumptions around this - that there is a choice of work available probably being the biggest. That certainly wasn't the case for the majority of people where I came from.

[widgetfox.livejournal.com]

There's also a distinction between "I want money in order to have status symbols / flash it around / climb a ladder / etc." and "I want money in order to provide a stable home and a happy life for myself and / or the people I love." This isn't about the deserving and undeserving poor, but there is eudaimonic well-being in showing up for something, even if it's unrewarding, because it enables a deeper life goal.

It's very nice to have the freedom and flexibility to be able to say "I want to pursue my art / study for a higher degree / change the electoral system / etc." but most people do not have that option. There's also a fair bit of research suggesting that paying someone to do something can disincentivise them even if they started out loving it.

[danieldwilliam.livejournal.com]

I think that’s the difficulty about money – it’s fungible and the ultimate commodity (1).

I can withdraw a bunch of cash and walk around with a few beers, a present for my mum, my home, security for my family, the status of having earned money through labour, the status of having earned more money than average through my labour all neatly folded up in my wallet

And utterly indistiguisable from someone else’s bribe for a serving police officer.


(1) except when your money’s no good.

[widgetfox.livejournal.com]

Perhaps. But your psychological experience and that of those around you are not indistinguishable.

[danieldwilliam.livejournal.com]

No, they are not.

That being my point, I think.

The statement, people only work for money is a short way of saying people only work for a variable bundle of goods and services and the satisfaction to be gained from having them which may or may not be formally located outside the boundaries of the organisation with whom one is transacting for the hire of labour.

[f4f3.livejournal.com]

And more, that the bundle is variable to a great degree - for some it's a weekend in Barbados, for others it's their rent and food shopping.

[danieldwilliam.livejournal.com]

Aye - we're into n-dimensional indifference curves here, which for me are the springhead of my love of economics.

The bundle may also contain the fellowship of work and the striving towards a collective endevour.

[f4f3.livejournal.com]

"A fair day's work for a fair day's pay makes a man strong in any company" as my Dad used to quote.

[widgetfox.livejournal.com]

We're back into the meta on the value of models.

Does everyone work for something slightly different, in which case there is nothing useful to be said?

Does everyone work for something different but there are some patterns that can be seen and usefully discussed - either a series of distinct viewpoints that can be modelled differently, or a series of underpinning themes, or a set of axes along which people vary?

I would be inclined to agree with Michael. I think that what he's talking about is a social phenomenon rather than a matter of individual motivation. Most people are required to work by the set-up of the system. Most people don't have a great deal of choice about what work they do. Most people, therefore, show up for work primarily because it enables them to lead a sustainable life. There will be high degrees of variance along the axes of individual tolerance for difficult work and individual willingness to opt out of the system and individual ability and motivation to find compatible work. There may also be periods where work is tremendously rewarding for reasons that have nothing to do with money - for example, the ability to serve customers or form strong collaborative relationships with colleagues or engage with interesting problems. This does not necessarily affect the fact that the primary reason for doing the job is still to earn money. I don't think that's a meaningless statement in the way that I think I'm reading from the above comment that you do?

[danieldwilliam.livejournal.com]

I didn’t say meaningless. I said shortened.

The genius of money is that it makes this sort of exchange both much more efficient and much more democratic.

Using money I don’t have to find someone who has (but doesn’t want) exactly the bundle of goods and services I desire and who wants (but lacks) exactly those things that I have but don’t want.

I don’t have to work through a centralised intermediary in order to get access to the gains from specialisation or trade. I have individual freedom and some protection from stong form and weak form corruption.

It’s also more private. I don’t have to explain to the community what I’d like. I can take my bundle of ten pound notes and go and find someone who wants to do business with me without involving the king or the high priest.

It means that it can be irrelvant to me what the bundles of goods and services my counter-parties are. We can do a spot transaction.

The fact that two people have different desires for different bundles of goods and services and that these can condensened into money and then unbundled is what makes economics (the process, not the science) happen.

(Saying that, you would have economics in a fuedal manor economy which operated without money using barter and fair-does but I’d argue that it still had ur-money in the sense that people carried round status and the ability to parlay this status into stuff coming out of the commonwealth. Money is something that allowed people to carry status outside of their own communities.)

[danieldwilliam.livejournal.com]

If we're talking about the violence inherent in the system that's a slightly different thing all together.

[f4f3.livejournal.com]

"There's also a distinction between "I want money in order to have status symbols / flash it around / climb a ladder / etc." and "I want money in order to provide a stable home and a happy life for myself and / or the people I love."

Yes. Just this. I make an assumption that for most people the choice is not between working in an A or B job, but between working and not working, and not being able to eat.

[danieldwilliam.livejournal.com]

And I think this where my dismay arises.

If people didn’t have to work to survive I’m sure there are quite a few who would put up their feet and do not very much and there are probably many more that would invest their extra time in building relationships with family and friends. I don’t accept that there are only a handful who would not want to take on what we would recognise as work. Things need to be done, or are better if they are done, or provide some sense of worth beyond the exchange value of the time and taking on these tasks is source of dignity and an ennobling experience.

Today I think we trade some of that dignity and nobility for material security but I don’t think all of us trade all of it and I don’t think we should accept a situation where it is okay for the default position to be that work is only ever a means to an end and has no intrinsic value of its own. I find that a Thatcherite view of the world.

There are many, many examples of people who are more than wealthy enough to give up work and who decide not to. One might argue that that is because the kind of people who get to a point where they have the opportunity to chose between nothing and something are the sort of people who can’t sit still for five minutes. I think that if were all issued with a small, comfortable funished, flat and a daily food parcel we’d still want to build and create and interact. I think that is profoundly woven into the fabric of humanity.

I chose to believe that there is dignity in labour and that to reduce the work that humans do to a mere transaction is to discard our own nobility. We might as well be robots otherwise.

We’re better than that and we deserve better than that.

[f4f3.livejournal.com]

There's nothing I disagree with im what you say.

However.

"There are many, many examples of people who are more than wealthy enough to give up work and who decide not to."

What does that amount to as a percentage of the total working population? And what kinds of jobs are these wealthy people doing? Are they minimum wage, for instance? Do they have the freedom to define how they work?

I think we would all want to create, build and interact, but for the majority (and I'd say the vast majority) of people they would not continue to interact, create and build by doing the same job they are doing now. If the need to provide for themselves, and their dependents (if any) were to be removed, they'd find a different way to do those things PDQ.

Dignity is something that is very difficult to maintain when you are treated with contempt. My grandad was a worker for the council and he took no lip off nobody, and litter from the gutter (yes, I'm quoting, but it's true - he worked for Glasgow Cleansing Department, and when my dad left school he worked there too, until he started an apprenticeship). He was got a fair day's pay, and while I'm sure he'd have had problems paying to stay at the Malmaison, his money was good at the bar. He could hold his head up in any company.
i'm sure you've watched "The Boys From The Blackstuff". For me, that Thatcherite period was when the notion of the dignity of labour was killed.

The last thirty years have been about removing the dignity of labour in the professions. In those 30 years civil servants, teachers and health care workers have gone from being pillars of society to being portrayed by the majority of the press as featherbedded skivers who deserve everything that's coming to them.

Robots are what is required, in our brand of capitalism. Homo Economus right enough, human resources, who can slot into your outsourced business process and maximise shareholder return. Behaving with nobility in a system that treats you with contempt is the path of the saint or the fool. When one player tips up the gameboard, or cheats so badly that the rules cease to matter, then what has to change is the system, not the players.

[danieldwilliam.livejournal.com]

"There are many, many examples of people who are more than wealthy enough to give up work and who decide not to."

What does that amount to as a percentage of the total working population? And what kinds of jobs are these wealthy people doing? Are they minimum wage, for instance? Do they have the freedom to define how they work?

I'm thinking pensioners here. So, quite a large percentage of the population potentially available for non-money labour.

And potentially, 100% of the population at some point in their life (barring accidents).

[f4f3.livejournal.com]

So, I was talking about people who are currently working for money. Not retirees. And, even there, retiral age is being driven up, and value of pensions driven down, so, again, the vast majority of pensioners don't have that choice.

[danieldwilliam.livejournal.com]

Capitalism is what you make it - it's pretty flexible and democratic that way.

Companies *are* there to maximise shareholder returns but there is nothing in the rules that say those returns have to be in the form of cash. I think our system has made an error and confused "easy and easier to count" with "the only thing we do"

So, yeah people wouldn't do stuff in the same way and that would be good. (Leading volunteers I found hard work but rewarding.)

But do stuff they would do.

[f4f3.livejournal.com]

Capitalism is absolutely NOT what you make of it. Contracting power in capitalism is skewed towards the contracting party with the most resources.

There are no rules about how companies maximise returns, and encouraging them to build social capital is a nice thing, but doesn't seem to be making much ground.

Co-ops, and worker owned organisations have this built in from the ground up, but they are trying to play the same capitalist game, with a huge handicap.

[danieldwilliam.livejournal.com]

All things being equal (and therefore handwaving away the conversion of huge numbers of Asian peasant workers into factory or professional workers and the simultaneous converstion of tacit knowledge into expert systems which have both had a deflationary effect on the wages of professional workers) I suspec they removal of social status from the professions would drive up the price.

Which would be a) a horrible self-fulfilling prophesy of a sort and b) decent pay back for a society who wanted to monetise everything.

[f4f3.livejournal.com]

"I suspec they removal of social status from the professions would drive up the price.
"

Why would you think this? It certainly hasn't driven up wages for teachers, doctors and civil servants (while driving up the cost in some ways, I agree).

Wages for lawyers sitting in Tesco will, I think, go down. Already much conveyancing is being done by unqualified assistants (nothing new - my sister was doing this 20 years ago) and the chance of doing Legal Aid work is being removed from a lot of cases.

Commoditised professional services means lower pay for the person performing the work, and bigger returns for the organisations employing them.

Re:

[toddieeruqy.livejournal.com]

http://www.youtube.com/watch?v=c6M_6qOz-yw