The "Freakanomics" of Growth

Every now and then, a book that focuses on non-business issues tells us more about running an effective company then one written specifically for businesspeople. A few years ago it was Moneyball by Michael Lewis. This year it’s Freakanomics, by Steven Levitt and Stephen Dubner. If you haven’t read the book yet, go out and buy it now (or click here).

I found several great lessons in the book, but the most important one for any business leader to understand is the power of incentives and the unintended consequences they can produce. One obvious example is incentives that are created by sales competition schemes or awards. When I was at Merrill Lynch, most of the awards programs (like President’s Club or Chairman’s Club) were based on annual production. All year long, we would work on our “business plans” which were focused on building long-term revenue. But every September, like clockwork, the brokers would check to see which “club” they had a chance to make. If they were close to the sales level required for one club or another, but weren’t assured of reaching it, all of a sudden their business mix would change ever so slightly to increase short-term revenue. The fact that these short-term gains were often achieved at the cost of long-term opportunities got lost in the scramble to take advantage of the incentive provided. For our sales team, the incentives undermined the discipline of long-term investing we had been coached to follow all year. For the managers, the unintended effects of the incentives were to remove the carefully structured alignment between the company’s goals and those of their clients. A double whammy of unforeseen consequences.

Incentives are created in less obvious ways as well. To understand what unintended incentives you may have in place, ask the following questions:

• How is the sales team structured? Is it a sales/service model or do you separate the functions? Is it a hunter/farmer model or some other structure? There is nothing more powerful than having a strong incentive already imbedded in the structure of your sales program.


• Is the focus of the company on introducing products or in understanding customers?


• What does management talk about? What gets management excited?


• How would your culture be described? Do the unwritten, unspoken incentives support your strategy?

Remember, incentives are tools for changing behavior and outcomes. Be very careful how and when you use them. In other words, try to build incentives into your business development program from the beginning instead of artificially introducing them from time to time to juice your results.

Until next time, Doug

By the way, if you building or trying to improve the effectiveness of your sales team and would like some more tips on how to make sure you have the proper incentives built into your sales structure from day one, give me a call at 410.544.7878