The Cobra Effect

- In economics, there's something known as the cobra effect. In colonial Delhi, India, British rulers, who were worried about the exploding cobra population, placed a bounty on cobras, paying for every cobra skin that was turned in. At first, the incentive appeared to be working wonderfully. The number of cobra skins being turned in increased rapidly. However, as the British looked more closely, they discovered some entrepreneurial residents were raising cobras simply to kill them and collect the bounty. When the government shut down the bounty program these cobra farmers, realizing that the gig was up, let the cobras loose. As a result the bounty program ended up worsening the cobra menace in Delhi. I recently read about a similar story that occurred in colonial Vietnam regarding the capture of rats. So whether you call it the cobra effect or the rat effect the bottom line is you have to watch out for how incentives can and will be manipulated. Here are some of the more common ways incentives can be manipulated and what you can do about it. One of the well-known problems of offering quarterly sales incentives is that the sales that take place in the last two weeks of that period are often unprofitable. That is, they're made solely to help the sales person reach an incentive threshold. One way you can mitigate against that problem is to incorporate profitability formulas into the sales. Another way people can manipulate incentives is by taking credit for results not entirely their own. For example, while all the work might have been done by a subordinate, the credit may have been taken by the boss to obtain the recognition and financial reward. You can mitigate that exposure by identifying all the employees involved in any project up front and their bottom line responsibilities. Recognition and reward should be one of the final steps in the project plan. Bosses can also be trained to be more inclusive of their teams. One of my clients told me of a problem they encountered when they set up an incentive for employees to catch co-employees doing something above and beyond. The employee would send the other employee an email wow card. The more wow cards, the more money you earned at the end of the quarter. After figuring out how to game the system a number of employees agreed amongst themselves to send each other wow cards on a regular basis. As a result, the payments to those employees spun out of control, until they required all wow cards to be approved by a manager. Bottom line is, all rewards and incentives have the potential to be manipulated. It's an unfortunate side effect of offering great rewards. So make sure you have your checks and balances on any incentive system and then forge ahead.