Aligning Incentives

/** Think it is very important to think about alignment, incentives, and together aligned incentives in all facets of life. When thinking about reasons why humans or even mammals/living things by that measure, it is obvious that incentives drive behavior. With the right incentives comes the right behavior and outcomes that ensure people are rewarded with those incentives (ideally). Likewise, things run very smoothly and with minimal friction if people are aligned: on the outcome, on a mission, on the goal, on the output. Alignment and efficiency go hand-in-hand. If you are aligning your past qualifications and interests with your day-to-day role, it is a smoother and more enjoyable experience. If you are aligned with your significant other on values and beliefs, that is (in my view) the highest priority for a long-term stable partnership.

Thinking about both together, aligned incentives I think is less common than they should be, and I think this is because it is often difficult to align incentives across multiple parties, especially if multiple parties have different motivations and want different outcomes. The common example is of a company entity, there are a few parties: executives, shareholders, employees, and customers.

The executives want compensation, the shareholders want strong equity performance (could mean appreciation/growth or stability/yield), employees want a fair wage/working conditions/ideally satisfying roles (recognize performance, opportunity for personal growth, etc.), and customers want great products. I think this is hard in practice to execute and requires creative solutions to achieve.

Finding a structure that works for your specific situation is an art itself. Some trends I’ve seen in these structures could include:

Having all parties experience growth/decline of their compensation via the same outputs, or if one party stands to benefit, all parties should benefit (and vice-versa). If I eat, we all eat. All parties look out for themselves, so if outcomes are shared by multiple parties, parties will be incentivized to do what is best for themselves and the group.
Since the individual tasks of these parties are all different, if someone inherently is at an advantage, there should (?) be some disadvantage to their state as well (know this is vague). The analogy I think of is common vs. preferred shares. In exchange for preferred shares being paid out first, they don’t have voting rights. Now I’m not saying these are equally valuable, where if they aren’t in a situation, then it’s fine that the preferred holders have this “advantage”. I think it is fine to have some hierarchy or difference, but it shouldn’t be too favorable for one party from the start.

I’ll continue to add to this over time since it is an unfinished thought

tl;dr above all, align incentives as much as possible

Cheers,

Vish

Published on January 19, 2023.