[Associate Professor Lamar Pierce] Organizations and institutions frequently use financial
incentives to motivate productive behavior.
Majority of people dislike effort to some degree, which forces authorities to either
monitor people intensely to ensure that they contribute, or to pay them based on their
observable performance.
Salespeople are given commissions, bankers are given bonuses, and even teachers are paid
for student performance.
The problem with these incentives, of course, is that you need to decide on which metrics
to base the incentives, and then communicate those rules to people in order to motivate
their performance.
You can only pay people based on what you observe, and you can't observe everything -
- which is why we get incentive gaming.
[Samantha] If the teacher grades based on a just "A, B, C, D," then I feel like I put
in less work to that class just because I know I don’t have to strive that hard
for a plus.
But if a teacher does grade on a plus and minus system, then I have to work a little
bit harder, you know, to make that plus or that regular C instead of a minus.
Incentive gaming is when people manipulate pay-for-performance schemes in ways that increase
their compensation without benefiting the party that pays.
Often referred to as "rewarding A while hoping for B," incentive gaming is an example of
how opportunistic and strategic people can be when there are financial rewards involved.
People will focus all of their effort on those incentives that pay them the best, and will
even manipulate information to represent their performance on those dimensions as
higher than it actually is.
The financial crisis of 2008 provided several excellent examples of incentive gaming.
Some mortgage brokers, who were paid commissions for originating mortgages, quickly learned
they could earn more money if they relaxed the credit requirements for homebuyers.
They were compensated based on originating a loan, not on whether that loan defaulted
in subsequent years, a costly outcome for the bank and homeowner.
The incentives designed to motivate effort and entrepreneurial behavior also motivate
people to increase their earnings in ways that hurt both their customers and market
efficiency.
[Lauren] The area where my mother teaches there are a lot of kids who come in who for
various reasons - migrant worker parents, kids who have been relocated, kids of recent immigrants -
they are still not up to the reading, writing, and math requirements that they should be
for their grade level.
There's a lot of pressure to pass kids along to… even if they’re not meeting certain
benchmarks, to just pass them to the next grade because it looks better for the school.
Examples of incentive gaming are everywhere.
When teachers are paid based on the standardized test performance of their students, they focus
much of their effort on teaching to the test and hurt student education.
When salespeople are given bonuses for reaching monthly sales targets, they offer customers
unnecessary discounts to buy now rather than later.
When workers are paid based on their relative rankings, they may focus their effort on sabotaging
their coworker instead of improving their own performance.
[Cheyenne] I feel like the American dream is to minimize effort and maximize your reward.
[Jason] If people are result driven, they really don’t care what's in between, you know?
They sacrifice whatever morally was supposed to be right.
The implication of incentive gaming is that managers and policy-makers need to understand
that humans are clever and opportunistic beings.
If you give them an incentive system, many of them will figure out how to manipulate it
to maximize pay and minimize effort.
Designers of incentive-based compensation systems must think carefully about unintended
consequences, putting themselves in the shoes of their employees, and ask,
"If I were given these incentives, what might I do to game them?"
Everybody around the world, no matter who you are, or where you are from,
will definitely game the system.
In my opinion, I think it's inevitable, unless you have really good mind control.
[Taylor] It looks like it’s better, but I feel like it’s really not, because there’s
going to be hurt in the long run.
[Kyle] You need to consider all aspects of what your decision is going to make, not just
how you are going to benefit in the short-run.
The key to making something more long-term and to seeing value in it and to not cutting
corners is to take pride in the work and want to see it succeed, and flourish, and last.