A Story about Perverse Incentives and How to Fix Them
Briefly: Perverse Incentives are incentives that promote behavior contrary to that intended, and usually in such a way as to have the opposite of the stated intent.
This article is a case study based on an interview series I participated in. Through that series, I discovered that the core values of the company and the company’s financial incentives were at odds with each other. During the course of the interviews I pointed this out, and suggested alternatives. I’ve changed the case slightly to keep the company itself private.
Last year, I had a series of interviews with CompanyX for a Senior Director position overseeing Directors of Product Management. I was informed the team had deviated from the core values at CompanyX and had strayed away from a goal oriented, data driven approach to their work. They were hiring someone to come in and help right the ship.
One of those interviews was a Product Management exercise. It was a 5 minute prompt, followed by 55 minutes of rapid ideation, critical reasoning, kpi definition, wireframing and presentation prep. Basically, if you were product managing over lunch on a paper napkin with little to no information and expected to produce a coherent, well thought out and specific result that could potentially help their business today (Decide for yourself how helpful this sounds). This was followed by another hour of a panel interview where I first presented my findings, and was then poked, prodded, and otherwise questioned or inspected by the team of directors present. Presumably, they were the folks I’d be coming in to support.
In the course of the example we were exploring the effectiveness of various email engagement strategies. Specifically with engagement on recurring emails the user had explicitly requested. Was it better to keep similar, but separate topic emails separate, or combine them? Both emails would lead the user to do the same core actions - just on different pages. Of course, the goal wasn’t simply engagement. CompanyX wanted each engagement to convert to a leads for their corporate customers by having the user submit personal information and share it with each company.
We discussed this further and I came to know that lead generation was how CompanyX monetized. If the user shared their data with companies, they got paid. It didn’t matter the quality of the leads. As it happens, I had done my research on the CompanyX values. I’d also been prompted before the interview to keep one value in mind at all times. This value boiled down to “always put the needs of the end user first.” Sounded pretty great when I read it. But, during the interview, the monetization strategy struck a bit of a discordant note.
You see, the user didn’t get any value out of being a lead for lots of companies. What they wanted was to share their data with, and create a lasting relationship with just ONE company. All the other companies didn’t matter. Submitting data to them was time consuming, wasteful, and often came with other stressors when companies simply didn’t acknowledge or respond to the data.
It wasn’t particularly good for the companies receiving leads either. Just like the end user, they really only wanted to create a lasting relationship with a single user. They needed qualified leads. Every other user’s data was noise… and they didn’t know it until they’d spent the time sorting through all the unqualified leads and inventing new ways to determine which lead was the most qualified. These companies were paying for this data nonetheless. After all, there was the off chance they’d create an even better relationship through an overwhelming amount of choice.
So, we had a situation where CompanyX had a core value that was quite clear; the end user comes first. The end user’s needs were quite clear; create a lasting, quality relationship with one company. The companies’ needs were quite clear; get qualified leads and create a lasting, quality relationship with one of the leads. And yet, CompanyX was set up to exploit the users and companies’ needs and maximize the noise rather than genuinely help solve their users' problems. They had created an illusion of help that allowed them to make money hurting people. They had a perverse incentive.
I pointed this all out. I provided them with alternative KPIs. I.E. lead generation rates that focused on time to deal closure and satisfaction with the deal afterwards. I wanted their product to say to their users “I’m going to solve this need for you all, and make sure you’re happy with the solution.”
Full disclosure: I didn’t get another interview.
How can you (or this company) avoid perverse incentives in the first place?
Pick a monetization path that is the convergence of your product vision & mission, the user needs, and the business value. When you find yourself deviating from that convergence, you’re likely to start introducing perverse incentives.
CompanyX had deviated well out of the product mission and user needs space into the pure business value zone.
What should CompanyX do differently?
Quite simply, CompanyX needs to change its monetization model. Rather than monetizing the number of leads generated, they need to monetize closing deals. CompanyX needs to be financially tied to getting users connected to the right companies, quickly and correctly. If the deal doesn't close, they don’t get paid. This appears riskier… and it’s certainly more subject to volatility in the volume of deals that can be closed. Perhaps it IS a riskier model. Still, it’s the one that is aligned with the CompanyX mission and values. It’s what CompanyX said it did, what it said it focused on.
