What dogs can teach us about business

Imagine this scenario.

Your 103 pound slobbering Labrador Retriever Goofy (name changed to protect the guilty) is sitting around the house one day bored and hungry — a perpetual state of being.  For no particular reason (is there ever?),  he jumps on the couch and stares at you with a self-satisfied grin.

“No! Off!”, you urge, but Goofy stands pat with a defiant tongue dangling well below his jowls.  Thinking you can outsmart the beast, you say: “Goofy, do you want a dog bone?”  Within nanoseconds, Goofy is at your side, drooling helplessly as you dig a dog bone out of the bin.
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The next day, Goofy is once again bored and hungry and looks expectantly at you for a treat. But alas, you’re too busy pounding out text messages on your iPhone. Then Goofy gets an idea — when it comes to food, he’s shrewd — and repeats yesterday’s transgression.  The plot replays like groundhog day.

​Congratulations!  You’ve just trained Goofy to jump on the couch whenever he wants a dog bone, which is, like, all the time.
This is of course a case of incentivizing the wrong behavior.  And business leaders make this same mistake at least as often as dog owners.  Why?  There tends to be a couple of reasons:
1. Unintended consequences of well intentioned but misguided incentives
The first explanation is the most benign.   In these cases, managers simply fail to think through the logical consequence of their directives.
In retrospect, you may think some of these examples are ludicrous knowing in advance that I’m highlighting incentives that backfired, but I can assure you that each of these situations draws on real world examples — and there are plenty more to choose from.

• Consider first the case of a new CFO who joins a high tech company to bring more discipline and financial accountability to the product development process — a  critical determinant of corporate success.  By way of background, assume the company had previously been quite sloppy, carrying too many dead-end projects for too long, avoiding clear accountability for market outcomes and lacking a clear methodology to prioritize projects in the development pipeline.
  To ensure a more rigorous process, the CFO declares (with CEO backing) that he will not approve any new project with a payback longer than two years while simultaneously suspending funds for any current program in development for more than three years without a saleable product.  Furthermore, the CFO announces that he will strictly apply IRR measures to prioritize surviving projects and require any approved project’s rate of return to exceed the company’s hurdle rate of 25%.
  “I know there will be some pain in implementing these new rules, but there’s nothing like some quick wins to demonstrate the benefits of our new disciplined approach”, declared the CFO in announcing the new program.  Now you can’t fault this CFO for ambiguity.  He certainly laid his chips on the table.  But it didn’t take long for the new evaluation metrics to heavily skew the company’s development efforts towards near term incremental product improvements, rendering the company highly vulnerable to more ambitious game-change disruptive product initiatives from competitors.

The trouble with incentives is that they work, and the unintended consequences may be far worse than the benefits initially sought.

• Another example involves incentives that unwittingly train consumers to behave in ways that harm business performance.  For example consider the case of a B2B company that incentivizes its salespeople to meet quarterly sales quotas while discounting prices as necessary near the end of each quarter to meet revenue guidance for Wall Street.  It doesn’t take long for salespeople to learn that it will be a lot easier to sell products with end-of-quarter discounts and it takes even less time for customers to learn that they’ll get a much better deal by holding off purchases until salespeople are desperate to hit their sales quotas.  This is a perfect example of the dog-on-the-couch scenario, because this company has essentially trained its customers to behave badly.  The net result is highly peaked sales patterns with resulting strains on manufacturing operations, cost and quality,  excess inventories and customer addiction to discounts.  The sad thing is that customers probably wouldn’t have figured out how to game the system on their own; they needed misguided corporate incentives to teach them!

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• JC Penney is discovering that once customers have been incentivized to behave badly, it’s very hard to retrain them.  For decades, JC Penney used a variation of the B2B example above to train customers to buy primarily on weekly promotion days.  When a new CEO arrived on the scene in 2011 and replaced JC Penney’s longstanding reliance on promotion-based selling with purportedly “fair and square” every day low  prices, customers  abandoned the company in droves.  Moreover, despite the radical change not only in their pricing and merchandising policy, but even in the 100+ year old company name — now known simply as jcp —  the company has been unable to attract nearly enough new customers with their uncharacteristic emphasis on quality and value.  In Q4, 2012, jcp’s same-store sales declined by a staggering 32%, year-on-year.  Apparently, the dogs aren’t eating the new dog food!
• As a final example, perhaps the earliest recorded case of unintended incentive consequences dates back to colonial India, where the ruling British government became concerned with the growing number of  venomous cobras infesting Delhi.  A well meaning government official came up with the scheme to pay any citizen a monetary reward for each cobra carcass.  At first, the program appeared be a tremendous success, as huge bounties were paid for scores of dead cobras.  But citizens continued to complain about ubiquitous snakes lurking in Delhi, and a cobra census was commissioned to confirm that there indeed appeared to be no change in the urban cobra population!

• What could explain such a disconnect?  Well, it turns out that enterprising entrepreneurs had built cobra breeding farms on the outskirts of town for the sole purpose of claiming the generous bounty — a far easier task than actually hunting for snakes in Delhi!  When the government became aware of the ruse, the reward program was scrapped, causing cobra breeders to set the worthless snakes free. Delhi wound up being inundated with even more venomous snakes than before the program began.  The eponymous “cobra effect” has become a poster child of misguided incentives with unintended consequences.

The antidote to unintended consequences is to carefully think through how all potentially impacted stakeholders, including those who do not share management’s intent will react to new incentives.  In each of these cases, executives imputed their values and intent on stakeholders — employees, citizens, customers — whose behavior was in fact motivated by very different objectives.
2. Disingenuous unwillingness to incentivize allegedly desired behaviors
Dogs learn early on to watch what their owners do, not what they say.  They are after all, dogs.
A common example of this same phenomenon in business is when executives disingenuously say the politically correct thing about their priorities but blatantly and knowingly incentivize contrary behaviors.  Examples abound.

• Consider the car dealer whose advertising slogans tout “customer satisfaction is our number one priority”, but salesmen’s bonuses are strictly based on total gross profit, with an extra generous spiff going to the salesperson achieving the highest grossing sales transaction each month.  So where it counts — in employee pocketbooks — such dealers are encouraging their salespeople to “rip customers’ eyeballs out” as the cynical trade jargon goes, while pretending to promote customer friendly business practices.
• Further up the value chain, some car manufacturers have also averred unabashed commitment to customer satisfaction, only to preferentially allocate their hottest selling cars — a prized incentive — to dealers with the biggest order bank, irrespective of track record on customer service.
• Another common example relates to enterprises that operate two distinctly different business models under one roof, but skew valued incentives to support just one of the business functions.  Many top tier research-oriented universities are a case in point.  Such institutions proudly proclaim their commitment to groundbreaking research and  educational excellence.  And there is no reason to doubt that college administrators truly would like to excel at both.  But tenure track faculty  quickly learn that promotion criteria are heavily skewed towards research achievements over teaching excellence.  So where it counts — the marginal allocation of faculty time —  research takes precedence over teaching effort.

The trouble with incentives is that they work! If dogs can figure out how to interpret and respond to incentives, customers and employees certainly can as well.  In each of the examples cited above, canine and human stakeholders learned to watch what management rewards and not what they say.
When there is a clear disconnect between stated objectives and incentivized behavior, institutions lose credibility and authenticity in the eyes of their customers and employees.
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As I put the finishing touches on this blog entry, my Labrador Retriever is besides me, where else, but on the couch.  My protestations not withstanding, I lost credibility a long time ago on canine couch rights with my misguided incentives.