Incentives drive behaviour – stake in outcome and benefits of rank

The Tim Ferriss podcast has fantastic guests and the interview with Safi Bahcall was an exceptional one. In this podcast Safi spoke about incentives and how incentives influence employee behaviour. These are my takeaways from the points made in the podcast from the 2 hours and 6 minutes into the episode.

Employee behaviour is influenced by their stake in the outcome (what do they get if things go well or if things go badly) and the benefits of rank (if they get promoted to senior manager or VP, what does this give them).

Stake in outcome – In a small company an individual gets a bigger slice of the rewards so the employee will work hard for it. For example, an employee in a 10 person company where they can get 10% of the benefits will result in the employee working very hard. As they get 10% of everything the company makes. In a large company, employees could receive a very small reward in comparison to the benefits a company achieves or possibly receive no extra reward beyond their salary. Therefore, there is little to influence the employee to work extremely hard if they are not significantly rewarded financially for that extra work. they get no reward or a very small % reward compared to the benefits they bring. So why do all the work for little to no reward.

Benefits of rank – in a small company, such as the 10 person company used before, everyone may be of the same level (apart from the CEO / founder) so there is little benefit of rank. As if you are the Vice President of a 10 person company with no one reporting to you, that is not a significant benefit to you and it will not influence your behaviour. So, in a small company, rank is not very important. However, in a large company with 100s or 1000s of employees there is a very significant benefit if you are the Vice President of something with people reporting to you. Consequently, the chance to achieve the benefits provided by being a Vice President will influence someone to work hard so they can get these benefits.

Depending on the size of the company, it can be best to use stake in the outcome or benefits of rank to influence employees, so they behave how you want them too.

Seeing which incentive, Stake in the outcome or benefits of rank, is the most influential in a company will also explain why employee behave in the way they do. So if you are in doubt as to why someone is behaving in a certain way then look at the incentive that they are being influenced by.