ENDORSEMENTS

EXCERPTS

Reprinted with permission of John Wiley & Sons, 2007

Incentives

Structuring incentives to bring about productive behavior without adverse unintended consequences is challenging. Proper incentives must not only motivate employees to create value and signal what is valued, they must also motivate employees to create that value in a principled manner. To design effective incentives, we must first have an understanding of human action.

Ludwig von Mises posits three requirements must be present for individuals to take action. These are: (1) unease or dissatisfaction with the present state of affairs, (2) a vision of a better state, and (3) belief that they can reach the better state.

We mow our lawns only when we are dissatisfied with their present condition, believe they will look better and know how to mow them. Customers switch when they become dissatisfied with their current supplier, believe another supplier will serve them better and are able to switch. When just one of these requirements is missing, people will not act.

Companies that fail to provide conditions that meet all three requirements create a culture of inaction. Companies that encourage creative destruction, provide a vision of how to create value and facilitate decision making, create a culture of Principled Entrepreneurship.

What any individual employee values is highly subjective and includes both financial and non-financial components. Possible non-financial incentives include belief in what we are doing, challenge, competition, pride, recognition, satisfaction, enjoyment, helping others succeed and being part of a successful team. Our Beaverhead Ranch in Montana provides an example of incentives that are a mixture of financial and non-financial. Recognizing that people don’t go into ranching for the money but for the lifestyle, of which a big part is working with their families, the policy of not allowing family members to work on the ranch was changed. Further, houses were built on the ranch for each family. The ranch immediately attracted a far superior work force.