Wait, Do Incentives Really Matter?

Kaitlyn Nothaft, Period 1, Honorbound

Incentives play a huge role in our lives.  We have the incentive to show up to work to get paid, we have the incentive not to speed in order to avoid getting pulled over.  Living in a materialistic world, it makes sense for one to create incentives, but why do incentives fail for the exact reason that we do live in a materialistic world, why do incentives always come at the expense of something or someone else, and is there such thing as a perfect incentive?

Many believe that by creating incentives it will encourage one to do or to not do something; however this is not that case.  According to the Harvard Business Review, six day-cares in Israel began to fine parents a late fee when parents picked up their children late, expecting the number of late pick-ups to decrease.  However, they found that the numbers increased, in fact, “the number of tardy parents doubled,” because the late pick-up fee “reduced their ethical obligation to avoid inconveniencing the teachers” by making the teacher’s extra time spent watching their child a service that they could now buy [1]. Another example, I work at a fitness studio where classes are $35, a normal price for a workout class, but only 14 people can be in one class, putting most classes in high demand.  To discourage people from signing up, not coming, and then taking another customer’s spot in the class the studio charges a late cancel fee, but you still keep your $35 class to use another time, however; the cost of the fee goes up with how late you cancel the class.  For example, if someone cancels eight hours before a class the fee is only $15, but if you cancel within two hours of the class, or simply don’t show up, it is a $25 fee.  Now I would expect for people to at least cancel several hours before their class in order to avoid the $25 fee, but it shocks me to see that many people have no problem incurring hundreds of dollars in late cancel fees, because the late fee makes their inconvenient decisions into a product that they can buy.  

Incentives can also have unintended consequences, these incentives are called “perverse incentives” [2].  Wheelan, describes “perverse incentives” as “the inadvertent incentives that can be created when we set out to do something completely different” [2].  According to the Knowledge at Wharton University of Pennsylvania, Green Giant was having a problem with insect pieces being packaged in with their frozen peas.  In an attempt to better the quality control and to reduce the amount of insect pieces from being packaged, managers created an incentive, a bonus.  The idea was that when workers found pieces of insects in the frozen peas he or she would receive a bonus.  Seems like a good idea, right? Wrong.  Instead this incentivized employees to bring insect pieces from home to be placed in with the peas and for workers to then “find” the pieces in the frozen peas to receive a bonus [4].

While the intended cause or idea of an incentive is often times for the better, unfortunately it is almost, if not impossible to create a perfect incentive.  

[1]  Samuel Bowles. “When Economic Incentives Backfire.” Harvard Business Review. July 31, 2014.  Accessed March 27, 2017. https://hbr.org/2009/03/when-economic-incentives-backfire.

[2]  Charles J. Wheelan and Burton G. Malkiel, Naked economics: undressing the dismal science (New York: W.W. Norton & Company, 2012).

[3]  Mar 30 2011 North America. “The Problem with Financial Incentives – and What to Do About It,” Knowledge@Wharton. Accessed March 27, 2017. http://knowledge.wharton.upenn.edu/article/the-problem-with-financial-incentives-and-what-to-do-about-it/.

[Picture] “Getting SPIFFS Right: Move beyond the old ways of doing Channel Incentives and Rebates.” Channel Mechanics. March 07, 2017.  Accessed March 27, 2017.  https://www.channelmechanics.com/getting-spiffs-right/.

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