Wednesday, February 18, 2009

Making Counterproductive Decisions

Most sales people, receive a large part of their compensation in the form of commissions. Incentives play a huge role in the success of companies, and even of entire economies, which is why I was very surprised when a few days ago I was told about the commission structure of sales people in a certain high-tech company. The sales people in this company were paid a commission of x% of sales for meeting their quota, and continued to receive the same commission rate on every dollar sold up to 200% of their quota. However, and here's the killer, once they reached 200% of their quota, they were no longer entitled to receive a commission.

Most people reading the above paragraph would immediately understand that this policy is self-defeating. It actually gives sales people a disincentive to deliver superior results. A sales person who can get a big sale but that has already reached 200% of his quota will have an incentive to delay the sale until such time as he can get compensated for it. Of course, the executive that designed this compensation policy evidently did not understand that by making this decision he was acting in contradiction to his own economic interest. His thinking probably went: "if this person sold three or four times his quota he could be making a killing at my expense" or "we can't have anyone making half a million dollars in this company". So while he is acting contrary to his own economic self-interest, he actually believes he is doing the right thing.

Unfortunately, none of us are immune to making self-defeating decisions: eating that extra doughnut even though we are trying to lose weight, or putting money in a savings account even though we carry 18% APR credit card debt, or procrastinating on that important project even though we know we really must get started. Why do we do this? There are probably many reasons, but here are some of the ways in which I try to avoid acting against my self-interest:

1. Game It Out - before making a decision, I try to "game out" the scenario while trying to cause the worst outcome that I can. In other words, if I am the sales person, not the executive, how can I take advantage of the compensation package I am trying to design? 

2. Keep My Interests in Mind - it is always useful to remember what it is that you are trying to achieve. For example, an executive designing a compensation package for sales people must keep in mind that he is trying to maximize profit, not to maintain a cap on salaries or fight for social justice.

3. Leave Yourself No Choice - knowing that I am a procrastinator, I try to force my future self to do the right thing by creating external forces that will help me make the right decision. For example, when I had my own business, I used to intentionally schedule customer meetings at 9:00 AM. That would help me get the day started without checking the NYTimes just one last time...

By the way, check out this article from Plonkee about folks making decisions contrary to available evidence. 

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