Maximum Alignment Equals Maximum Success

I had breakfast recently with a friend from college who is doing very well for himself. His company deals in public utilities. They work all over the world. I asked him his greatest piece of advice.

“Our company was doing fine until a few years ago,” he replied. “But it really started to go ballistic when we changed the way we structure our contracts. Now we make sure all our contracts bring into alignment the direction and timing of everyone’s interests. We all want the project to succeed, because we all get paid when it does. If someone gets a big chunk of money up front, all their motivation to keep at it goes out the window.”

It seems kind of obvious that this structure would produce better outcomes, but you may be surprised at how infrequently it is employed. Just the other day, I heard about a city that contracts to private bus companies, who get paid regardless of how many people take the bus. These companies are then understandably disincentivized from wanting people to ride their buses: it makes them stop, costs them more in gas, requires more maintenance… All in all, they’re much better off if they can just drive the buses around and around in circles, empty.

This is obviously a lousy outcome for the city, the citizens, and the planet. And it stems from a misalignment between the rewards for the bus companies and the rewards for everyone else.

Imagine instead that the bus companies were paid a base rate to ensure they could operate without interruption, and then a bonus tied to the number of people riding the bus. Imagine how that would affect the behavior of the bus companies. They might look for ways to make the ride more enjoyable: marketing campaigns to promote public transportation. More comfortable buses with artwork on the ceilings. Sheltered bus stops with honesty libraries and swings instead of benches. There are a million ways riding the bus could be more engaging, more fun, and more rewarding, and all of these ways become more accessible if the bus company is motivated in the same way the city is.

And imagine if the driver were given a bonus based on how many people ride her bus. She might behave less like a truculent teenager forced to do chores and more like a bartender who benefits from caring about her customers. Imagine that you get off your swing, get onto the bus, greet your favorite bus driver by name, sit down and raise your gaze to find one of Kiel Johnson’s pieces looking down at you. Would you be more or less likely to ride the bus?

Bear in mind this isn’t just about a commission structure, or payment only for success. The hypothetical scenario I just raised incorporates a base payment structure so that the risk of participating is low enough that you don’t block people entirely from entering the market.

What it is about is ensuring positive outcomes. If you’ve got one person pulling in a direction, you might inch towards it. But if you’ve got dozens, you’ll fly. Align your rewards, and watch yourself fly.

How do you structure your contracts?

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1 comment about "Maximum Alignment Equals Maximum Success ".
  1. Paula Lynn from Who Else Unlimited , September 7, 2012 at 2:47 p.m.
    Follow the money. WHo gets paid not to be doing their job ? Who profits from not managing their managers ?