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. 

Enjoyed this post? Please consider subscribing to Money and Such by free RSS Feed or by email.

In Honor of Darwin

Last week was Darwin's 200th birthday and many publications took this as an occasion to write about this great man and his work. Even though this has nothing to do with personal finance, I decided to also use the opportunity and celebrate the birth of one of the most creative and influential people ever born, while also telling you something about myself.

I consider myself somewhat of an empiricist and fancy myself a rationalist, someone who uses the available facts and a rational theory to make his decisions and to inform his view of the world. Where God is concerned, I am an agnostic, but only to the extent that I can't prove that God doesn't exist, much like I can't prove that fairies don't exist either (sorry for stealing that one from Richard Dawkin's recent book). Darwin's work is an inspiration to me. This is a man who single handedly developed a rational, empirical and amazingly testable theory that explains the origins of humankind and of every other living organism on the face of this planet. And he did so through hard work, brilliant deduction and inspired leaps of logic. Is there any higher honor or calling? Do you need any further proof that humans are an incredible species? By the way, did you know that the theory of evolution was also independently developed by Russel Wallace?

This is a man whose work underlies much of my own philosophy and perception of the world. It is people like Darwin, and Newton, and Watt to which we owe modern life as we know it, and science is the tool with which they have given us this bounty.

I would like to end this post with a quote from Kurt Vonnegut's "Timequake" which mirror's my own view of the world and of what I aspire to be:

"Humanists try to behave decently and honorably without any expectations of rewards or punishments in an afterlife. The creator of the universe has been to us unknowable so far. We serve as well as we can the highest abstraction of which we have some understanding, which is our community."

What have creationists done for us lately? (or ever?)

Enjoyed this post? Please consider subscribing to Money and Such by free RSS Feed or by email.

The You Brand

Brands are not just for soft drinks and cars, you are also a brand. You may not think of yourself as a marketable product, and it may very well be that most people would never think of you as a brand, but that doesn't mean that they don't identify you with certain values, attributes or activities, in short: a brand. The key is to make sure that the "You Brand" is a valuable one and that it fits your career and personal goals. This is another post in my series about finding a job and protecting your job in a tough market (you can find even more articles on the subject here).

If asked to name a couple of top performers in my previous company, the names Paul and Ed would immediately jump to mind, even though I left this company almost a year ago. What is it about those folks that makes me remember their names in the context of top performance? The answer is somewhat different in each case, but both seemed to go out of their way to be nice, deliver results and help out, even beyond the scope of their duties. These are folks that will likely quickly find a new position if they ever find themselves out of a job, because people have been conditioned to connect these individuals with top performance. Here is how you can take control of your own brand:

You Have a Brand - you have to understand that whether you are actively building your brand or not, you do have one. The only question you have to ask is whether you are building and nurturing it to suit your purpose, or whether you are letting others define you.  

Defining the "You Brand" - before building your brand, you have to first define what you want that brand to be. In my case, I would like people to think of me as: extremely competent; skilled in multiple areas (i.e. the opposite of a narrow specialist); a people's person; someone who can help.

Understanding the Gaps - now that you understand what you would like your brand to stand for, try to be honest and identify any gaps between where you want to be and where you are currently. Understanding the gaps comes prior to taking any action.

Developing the Brand - just as Red Bull wants its brand associated with extreme sports, and consequently sponsors many of them, you need to connect yourself as tightly as possible with the values you want your brand to stand for. If I want my brand to stand for "someone who can help" - it is important that I live this value on a daily basis. For this reason, if someone in the company asks me to help edit a document or to comment on their work, I will do so, even if it's not my job. Since I want my brand to stand for extreme competence, I will never do a half-assed job. There is no such thing as too small of a project to be done well. The brand message must be consistent. Always.

Getting the Word Out - It's not enough for you take action to build your brand, others must get the message. As always, bragging is a really bad idea, and in any case, actions speak louder than words. You need to get a buzz going, and the best way to do so is to make sure that people are aware of your work. Finding high visibility projects, doing more than is asked, and finding other opportunities to shine, is key. Keep your eyes open and pounce when the right opportunities present themselves. 

Patience - building great brands is all about patience and consistency. Don't expect miracles over night. In fact, don't expect miracles at all. However, if you understand what you want people to think of you, build your plan and consistently deliver the right message, in actions rather than through words, you will be well on your way to building a positive brand that folks will remember. Next stop, career security.

Enjoyed this post? Please consider subscribing to Money and Such by free RSS Feed or by email.

Planning for Unexpected Money

Everyone comes into some unexpected money from time to time.  Think about the times when you've received a birthday card in the mail with money; when you've receive a tax refund or rebate; or an unexpected inheritance.  Maybe you purchased something with a rebate offer, and the check finally arrives in the mail (long after you forgot you even had a rebate coming!)  Any money you receive that is outside your regular income is considered “unexpected”.  What do you usually do with unexpected money?  Deposit it into your every day bank account?  Buy yourself something? 

If unplanned, the majority of unexpected income simply gets absorbed into everyday spending.  If it's deposited into the account you use to pay your bills and withdraw money for entertainment purposes, chances are you use a little here and there and couldn't even say within a week's time where the money was spent!

Instead of letting unexpected income trickle through your budget almost unnoticed, you could create a plan to help you deal with unexpected money.  I know, you're probably thinking if it's “unexpected” how can you plan for it, but the answer is actually pretty simple:

Decide how you will use all unexpected income before you receive it.   You don't have to know when the income will come in or how much it will be if you set up a plan using percentages.  For example:

• 10% in your pocket for extra spending money
• 50% in long term savings
• 35% toward your highest interest debt

With categories and percentages decided upon before the money arrives, you'll know exactly how much of all unexpected income will go to savings, debt repayments, and spending money.  Your only other decision is to determine how much you have to receive before you follow these rules – some people will do the same with all unexpected income whether it's $5 or $500; while others choose to follow their plan only if the unexpected income is of a specified minimum amount.

The trick to making a “plan for unexpected income” work to your benefit is to create it – and then stick with it!  Consider it an extension of your budgeting (if you have a budget you’re committed to) and don't let the temptation of extra money lead you to an extra purchase or to a night on the town that you haven't financially planned for.

Trisha Wagner is a freelance writer for DepositAccounts.com, where you can compare rates from dozens of banks in one place. Trisha writes regularly on the topics of personal finance and saving money.

If you are interested in having your original article published as a guest post on Money and Such, please contact me at the e-mail address provided on the left column of this page.

Enjoyed this post? Please consider subscribing to Money and Such by free RSS Feed or by email.

Why Real Estate is a Horrible Investment

I am not one to kick an interesting investment opportunity when it's down - in fact, I think that the best time to buy assets is when their values have been dramatically beaten down, and if that's your line of thinking, real estate should certainly qualify. However, I still think that owning real estate for investment purposes is a horrible idea. I am not talking about investing in real estate through REITs as a method of diversifying your portfolio - that is actually a good idea, we invest about 8% of our portfolio in REITs for exactly this purpose. When I am talking about real estate being a bad investment I am talking about buying residential real estate for investment purposes.

I have previously written that buying a house is a bad investment, and I stick by that original statement. However, I am not against buying a house, just as I am not against buying cars, TVs or new clothes. A house is a place you where you live in, it is not an investment. Granted, houses tend to have a good resale value and if you are fortunate, the price may even go up over time. My point is that your residence is your home, not an investment. 

So why do I think that real estate is typically a bad investment idea? My argument can be summed up in a single word: leverage. Leverage is the reason that most people think buying a house is a great investment opportunity to begin with.  Let's say you are buying a house worth $100,000, and let's assume that you have 20% to put as down payment, i.e. $20,000, and the rest you finance using a mortgage. If the value of the house goes up 10% in  the fist year, it is now worth $110,000. However, your mortgage is still only $80,000, meaning that your equity is now worth $30,000. In a single year your house went up 10% in value but you got a 50% return on your original investment. Who could turn down such a wonderful bargain? You are using other people's money to super-charge your returns. What a brilliant idea! Isn't this the perfect money making strategy?

Of course, that's not the case, as our current economic meltdown has made abundantly clear. The cold logic of leverage, which does phenomenal things to your returns on the market upswing, has an evil twin that emerges when the market heads south. Same example: a 20% down payment used to buy a $100,000 house, only this time the house value goes down 10% in the first year. Now the house is worth $90,000 so your original $20,000 investment has been cut in half when the mortgage is accounted for. If the value of the house declines by 20% your investment is wiped out completely.

The bottom line is this: investing in real estate by financing the acquisition through mortgage, is exactly the same as investing in the stock market using borrowed money (investing on margin). While the market goes up, your returns are turbo charged, you feel on top of the world, but when the market starts to fall, the value of your investments quickly goes up in smoke. Now here is the crazy thing: the government would never consider encouraging people to buy stocks on margin, but they have made many policy decisions aimed to do just that in the case of the real estate market. Millions of Americans have allowed themselves to be duped by the fallacy of a real estate market that folks claimed could never go down. "All real estate is local" the saying went. Even the most naive real estate investors and home buyers no longer believe that there is any asset in the world that only appreciates in value without ever falling.

Remember this lesson when the next bubble starts to inflate.

Enjoyed this post? Please consider subscribing to Money and Such by free RSS Feed or by email.