Power of Incentives

Charlie Munger told a story that FedEx solved a logistical problem where employees couldn’t turnaround parcels fast enough until they paid workers by shifts instead of by the hour. China life insurance companies find it difficult to sell better priced risk products because their agents prefer to sell cheaper, easier to sell but loss making products. A parent offers to a buy a sports car for his irresponsible teenage son if he performs well at his university exams.

Incentives (or the lack of them) drive positive or negative action.  Self help guru Tony Robbins over-simplified when he stated humans are driven by pleasure and avoiding pain.  If an adult version of the famous marshmallow test is repeated in the workplace, both employer and employees will struggle to agree on a plan, decide and act rationally. Even if the smartest people in the business are hired and clear goals are identified, poorly structured incentives will drive wrong action. To make matters worse, an irrational or misguided long term corporate strategy will drive wrong action for that specific long period of time.

As a junior investment banker once, I learned the rite of passage was to work late and be on standby for any deal. Bonuses were rewarded based on effort as it was difficult to attribute value add to junior bankers.  Productivity was of limited concern and often poor. I couldn’t change incentives from the bottom up and  I was losing sleep unnecessarily.

From my buy side experience, I was once rewarded based on individual profit earned and to a lesser extent, discretionary bonus based on firm performance. We were encouraged to hunt for our own best investment ideas alone.  As such, when team work was required, teamwork amongst peers seldom function properly as employees continue to focus on their own transactions.

If you tell a broker you are happy to pay fees for XYZ, you should expect him to come back with proposals. If you never believe or plan to support XYZ  but told the broker anyway because there are many conflicting objectives that happen in corporate life, 2 things happens – the broker will work hard on XYZ and realize later you wasted their time, and over time, they conclude you don’t respect them or know what you are doing and ignore you. This is adverse to business if not properly managed, and it happens all the time.

Every organization should define its goals and values clearly and transparently, and structure incentives to reward employees for right behaviour and action. Employees are rational when they act to maximize their return on effort notwithstanding that management may be marching them off a cliff.

Death of Lee Kuan Yew

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When the founding father of a country passes away, it is unavoidable that its people will evaluate his past contributions and sacrifices. It’s neighboring countries will do so too,  and in LKY’s case, many past and present global leaders. For a soon to be Singapore Permanent Resident like myself, LKY was largely responsible of making Singapore a destination of choice for my young family’s migration here – corruption free government, safe and clean neighborhoods, good public schools and transport systems and other world class amenities.

I grew up in Malaysia and it was fun then to observe the public spats between then PM Dr Mahathir and LKY. I didn’t understand the political and national risks involved over electricity and water. I was also fascinated by the various political uprisings in Thailand – my favourite holiday destination. I remember many Chinese Malaysians voted for the main political party for peace and national unity. Political stability was something i took for granted when young. In a resource rich and NEP driven Malaysia, citizens come to accept its many faults in society. In a way, I grew up observing the many opportunities available to improve and contribute. And like many Malaysians based in Singapore, we are still hopeful but took the easier way of settling down in a more welcoming country.

As I grew older, i was fascinated by how far ahead Hong Kong and Singapore is relative to Malaysia, Philippines, Indonesia and Thailand.  Was it because of culture, work ethics, it’s people, natural resources, past colonial history etc? The list goes on and on. It’s easy to point out the faults but difficult to identify the causes of success.

Since I moved to Singapore in 2013, I have come to appreciate the threats that LKY highlights for Singapore better, and the need for self sufficiency, national defence and anti-corruption policies. As an economist by training, I often wonder why Singapore’s GDP per capita is so much higher than its neighbors and have come to believe that the highly adaptive government and their pragmatic economic policies have a large part to do with it. During my 6+ living years in Hong Kong, I was amazed with the vibrancy of the cosmopolitan city, it’s many TVB and movies stars, it’s many restaurants and retail shops. But that’s from the perspective of above average income earner. The poor in Hong Kong live a very tough life with very little state help for many years. The concept of living in cages and shoe boxes in a cold winter, fear for food safety and heavy pollution  should not be synonymous with living in a modern city.

As such, it is with great hope that my young family migrate to Singapore. My wife and I took the conscious decision to send our kids to local public schools, volunteer where possible, and hope that even with the passing of LKY, Singaporeans will continue to be hopeful, welcoming and pragmatic as Singapore continuously redefines and asserts its role in the region and globally.