Are Processes Limiting Your Business? Focus on Incentives Instead

By QuickBooks

2 min read

Lawyers, accountants and politicians obsess over processes and compliance, whether it’s following procedures and precedent, complying with accounting rules or passing laws to modify behavior.

But economists think differently. They’re not concerned with processes and compliance, but rather incentives. Incentives matter because they dictate the outcome, not the process. There’s no incentive to wash a rental car before you return it, so nobody does. And if there’s no incentives to following processes in your business, you shouldn’t do it either.

An Historic Example

No better example exists than the convict ships that took criminals from England to Australia during the 18th century, as told by Charles Bateson’s The Convict Ships.

At first, the captains of the ships were paid based upon how many prisoners boarded the ship in London. This gave the captains an incentive to pack as many prisoners onto the ships as possible for the six-month journey, regardless of the health or safety of the prisoners.

Additionally, the captains usually hoarded the food so they could sell it upon arrival in Australia. This created a mortality rate of nearly one-third for the prisoners. Those lucky enough to survive the journey arrived “lean and emaciated” and “full of filth and lice.”

Now, there are many ways to deal with this problem from a “process and compliance” point of view. One could deal with prisoner mistreatment by passing a law that forced captains to comply with procedures for limiting the number of convicts, assuring an adequate diet, competent medical care, sufficient exposure to sunlight, ample food and medicine on board, and so forth. In fact, you could even hire external auditors to attest to the compliance of these standards.

From an economists’ perspective, however, all of this is quite bureaucratic, expensive, ineffective and unnecessary. If a way can be found to align the incentives, the rest (i.e. the processes and compliance) will take care of itself, which is exactly what happened.

Once the compensation was changed from paying for each convict boarded in London to paying for each one that disembarked alive and well in Australia, the “financial incentive to treat convicts humanely” dramatically improved.

The first three ships to sail under this new compensation plan experienced only two deaths out of 322 prisoners. As Bateson concludes, “the gross abuses earlier practiced were almost entirely eliminated.”

Incentivizing Your Workplace

We undoubtedly need processes to do standard, routine things. But we also need to understand that following a process can limit creativity, innovation and risk taking. And as we learned from the example above, misaligned incentives can lead to unethical behavior and questionable practices.

Are there areas in your organization where blindly following processes is leading to suboptimal results? For examples, are meetings getting in the way of truly creative work? Is protocol and the approval chain hindering innovation? Is a commitment to historic procedures stifling productivity? The goal of a business should be to grow and produce to the best of its ability; it shouldn’t be a commitment to follow outdated or cumbersome procedures.

Take the focus away from procedures, and enable better outcomes by changing and aligning your incentives.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

Related Articles

The Top 5 #WaysToGrow Your Small Business

There are a lot of things that keep small business owners up…

Read more

How to Start a Company from Nothing

How’s this for a company doing things differently: no physical inventory, a…

Read more

The Small Business Stack: Essential Tools for Running and Growing Your Business

When Iliya Rezvine first started his transportation business, he had to be…

Read more