The Tragic Truth About Misaligned Incentives
Why Executives Won't Stop Gambling With Your Future (Unless You Act Now)
Imagine the following scene:
Executives sit around an opulent boardroom table.
They are celebrating record shareholder returns. Fat bonuses and lavish vacations are their reward.
Meanwhile, in the company warehouse far below, a 30-year veteran employee is cleaning out her locker for the last time. She was fired that morning due to cost-cutting measures -- part of a broad-sweeping decision made during the same boardroom meeting.
She was collateral damage in their relentless pursuit of short-term gains on behalf of shareholders.
This scenario is no longer constrained to blue-collar workers, but to tech workers, as well.
The executives' incentives did not encourage them to think beyond the impact on the short-term stock price.
"All human behavior emerges from incentives. Any time you see any human behavior at scale, someone has created an incentive, either consciously or unconsciously, to encourage that behavior. And so, when you see these runaway phenomena on the Internet, or in society, or in companies, look for the incentives. The incentives will always tell you why people are acting the way they are." ^1
What happens when incentives are misaligned (and by their nature, opaque)?
- Wells Fargo Bank account scandal: employees were incentivized by bonuses for customer accounts opened, leading to fraudulent account or unexpected feeds
- Purdue Pharma overprescribing OxyContin: bonus and commision structures incentivized misleading marketing and contributed to the opioid epidemic.
- Facebook privacy violations: compensation based on time-on-site metrics drove design choices around engagement over privacy, consent, and ethics.
Can the problems be simplified around incentives? No. But they can't be ignored, either.
Incentives don't necessarily need to reference explicit tit-for-tat compensation, either.
The lack of accountability or "moral hazard" is a form of incentive for higher risk-taking.
For example, government bailouts or failures to prosecute executives following the US financial crisis of 2008 creates a moral hazard environment to take risks, even with money belonging to other people. This is what Nasseb Talim would refer to as "skin in the game."
"If you have skin in the game, you want to avoid losses more than you want to make gains. You care more about survival than success." [1]
How does the decentralization movement powered by blockchain address this?
- Smart contracts can put into place fair and transparent incentive structures to reward economic growth (people should still be able to get wealthy for positive sum games)
- Cryptographic governance enables a broader range of decision-making the encourages participation, dispursed delegation, and visibility into enforcement.
- Ownership distribution can create a distribution of economic output more broadly based on decentralized actors
Nassim Taleb, Skin in the Game: Hidden Asymmetries in Daily Life, Random House (2018), p. 295. ↩︎