Kliuless #46: The Impact of Incentives on Innovation

[KL: Recommend listening to podcast from 2:06:44 onwards; transcript also available]

"Whenever you put people together into a group, you create two forms of incentives. One is what we often [think] of: the stake and the outcome. So let’s take a biotech company, might be a 10-person company. Your stake and outcome is all 10%, as if everything’s divided equally just for the sake of simplicity. Now you double that, you’re 20-person now, it’s 5%, it’s getting smaller. As it grows, your stake and outcome is getting smaller and smaller, so your incentives for stake and outcome in rolling up your sleeves and fighting hard to help that loonshot or crazy idea succeed, it’s very high when you’re a small company, but it’s getting smaller and smaller as you get larger. What’s changing?

There’s a second incentive that you create no matter what happens whenever you organize people into a group with a mission and a reward system tied to that mission. You create a second incentive, and that is perks of rank. Two forms of incentive. A simple way to think of it is equity and cash. Equity and base salary. But let’s think about it even more broadly. Stake and outcome and perks of rank. What does that mean? Well, are you the team captain or a team member? Are you the CEO or a VP? When you’re a 10-person company, perks of rank is irrelevant compared to the stake, because if you’re the team captain or the team member, it might be a few thousand dollars difference, but if your project works or not, it’s a few billion dollars, or a few million dollars, or whatever. But of course, as it grows, it flips. All of a sudden, perks of rank become more important

[W]hat I’m talking about is people spend so much time focused on culture, and psychology, and empowering, and group dynamics. There are literally thousands or tens of thousands of books and articles about it. We spend so much less time on structure. What are the incentives? How are we motivating the behavior that we want to see? For example, here’s how it can help us think about that last one: why do groups suddenly change? Well, as they grow big, all of a sudden, the balance between those two incentives, the balance between them shifts. And as you grow bigger, and bigger, and bigger, stake and outcome gets smaller and smaller and perks of rank matter more, and more, and more and, at some point, they cross. Boom!

That’s when people start caring more about politics and promotion and less about the success of their crazy idea. When you care about politics and promotion, what do you do? You try to shoot down other people’s ideas, and that’s when good ideas die. That’s when the wisdom of the crowd turns into the tyranny of crowds. Underlying that is what you ask: incentives"

"But in many respects, Google's most vexing threats during that period came from inside the company itself. Over the next two and a half years, the company would find itself in the same position over and over again: a nearly $800 billion planetary force seemingly powerless against groups of employees—on the left and the right alike—who could hold the company hostage to its own public image"

“We must support the PlayStation platform -- that is nonnegotiable,” Layden said. “That said, you will see in the future some titles coming out of my collection of studios which may need to lean into a wider installed base”

Related: Microsoft has "no plans" to release more Xbox exclusives on PS4 or Nintendo Switch

Related: PUBG adds dynamic weather