A Different Take On Incentives

Nicholas Sleep wrote some of the best shareholder letters ever while he was managing his fund, Nomad, with his partner Qais Zakaria.

In his June 30th, 2013 partnership letter, Nicholas Sleep dedicates a section to writing about a different perspective on incentives that includes meaning instead of just money.

Although money does motivate people to do certain behaviors, it is not the only incentive that drives behavior. Afterall, lots of people still attempt very ambitious projects even without the prospect of huge monetary gains. So, what is the other big incentive?


The other incentive is the meaning one finds in their work.


Dan Ariely is an author, professor and founder of “The Institute for Advanced Hindsight” and has done a lot of studying about non-monetary incentives. Dan gave a TED talk in 2012 that talked about academic experiments that were done in order to take the meaning out of work and see how people behaved.


The researchers, who ran the experiments, paid people to build robots made from LEGOs. These people were paid less money for each additional robot that they built.


There were two groups, the “Rewards” group and the “Sisypheans” group. The finished robots that the “Rewards” group built were placed on a shelf for all of them to see and the finished robots that the “Sisypheans” group built were taken apart in front of the builder with the parts given back to them to use in building their next robot, for the lower fee.


The researchers found that the “Sisyphean” group stopped building robots sooner than the “Rewards” group which was expected. But what wasn’t expected was that the “Sisyphean” group stopped building their LEGO robots a lot quicker than the researchers expected.


What the researchers concluded was that taking apart the robots that the “Sisyphean” group built in front of them took way too much meaning out of the work for them that they lost the incentive to build much sooner even though they were still getting paid. The “Rewards” group had more meaning since there robots were displayed on a shelf for them to see as opposed to being disassembled.


Nicholas Sleep next discusses a time in the 1940’s when food companies were marketing a powdered cake mix that was so easy to make that all you needed to do was add water but it turned out that the results of the marketing campaigns were terrible.


What the food companies did in response to the poor sales was they made a powdered cake mix that required not just water, but eggs, milk and sugar as well. The result was that sales improved a lot and this is a result of the “Ikea effect” in psychology where the value of the product being built is perceived to be a lot higher because of the effort and time that the owner put into building it.


Dan Ariely then decided to do his own experiment after learning about these results.
Dan tasked one group of people to build a complex origami model with instructions and another group to build a complex origami model without instructions.


He then asked each group how much they would pay to keep the origami model that they just built and it turned out that the group who didn’t have the instruction manual was willing to pay a much larger price to keep their origami model even though their origamis were worse than the ones who had the instruction manual. Both groups were also willing to pay more than the market price of what their origami model would have cost had a professional built them.


Nicholas goes on to mention that there has always been a battle between efficiency and meaning.


Some of the best entrepreneurs like Jeff Bezos and Warren Buffett don’t particularly care about being paid lots of money since they have turned down bonuses, option packages and huge salary increases.


And some of the CEOs of companies that Nicholas’s investment partnership, Nomad, own in their portfolio don’t care about compensation since they are already extremely rich but continue to work hard and rather than discuss money, they discuss all of the future opportunities that their companies have.


In other words, as Nicholas Sleep writes,

“These [CEOs] derive meaning from the challenge, identity, creativity, ethos (this list is not exhaustive) of their work, and not from the incentive packages their compensation committees have devised. The point is that financial incentives may be necessary, but they may also not be sufficient in themselves to bring out the best in people.”