For many companies, success depends on innovation, which requires a certain degree of risk and failure. When companies launch new products or services that are well received by the market, the risks HE Tuber they take are ultimately worth it.

If a company encourages employees to innovate but punishes them when new approaches fail (e.g., deferring promotions/deducting bonuses), it sends a mixed signal: Punishing failure discourages people from taking risks and trying new ideas. Worse, it reduces the ability to learn from failures because people try to hide them and become a bunch of mediocre employees competing to maintain stability.

Granted, this is easier said than done. It can be a challenge to create an environment where high-performing, achievement-oriented, competitive individuals can thrive while also feeling comfortable sharing and publicly analyzing their mistakes.

But the Israeli Air Force did it. During the 1973 Yom Kippur War, two formations of F-4 fighter jets set off to attack the headquarters in Damascus, Syria. Each jet quartet was led by an experienced and qualified pilot, and the weather that day was terrible for the air raid: the entire area of ​​operations was covered by a layer of cloud, and the aircraft could only fly beneath or above it.

If they fly below, they can see the target, but people on the ground can easily see them and become easy targets. If you fly above, although it is safer, you can't see where the target is.

One leader saw the weather, realized both options were bad, and turned around and abandoned the mission. 

Another decided to fly over the target and, by pure chance, discovered a hole in the clouds above the target and his formation was able to attack and destroy the target.

In the debriefing, the commander praised both leaders and claimed that both decisions were correct. His message was clear: Every leader is free to make decisions without fear of being punished for failure.

Eliminating competition and raising prices is a basic strategy in business, but as consumers we don't appreciate such behavior and it may also be illegal (monopoly).

In June 2012, consumer review website Bazaarvoice acquired competitor PowerReviews. As a result of the acquisition, Bazaarvoice's stock price soared above $20, and its executives cashed out $90 million in stock. But its glory days did not last long. In January 2013, the U.S. Department of Justice launched an antitrust lawsuit, forcing Bazaarvoice to spin off PowerReviews, causing its stock price to fall below $7, causing huge losses to shareholders.

Were Bazaarvoice executives so misled that the lawsuit came as such a surprise? Obviously not. They anticipated this and took the risk. The complaint cites internal company documents in which senior Bazaarvoice executives described PowerReviews' role in the market, making it clear they were aware of the risks.

If not ignorance, why would executives do this? In fact, the executives saw an opportunity to make money, $90 million to be exact, and chose to take short-term profits despite knowing the potential long-term impact on the company.

As an analogy, shareholders are recruiting a new CEO for the company. When they hired him, they communicated their goals, stressed the importance of the company's long-term success, and hoped to inspire him to perform well. To this end, a large portion of CEO compensation is equity in the company.

But one cannot ignore the fact that equity vesting may be based on short-term performance. This does not prevent the CEO from developing strategies that may yield short-term results but are detrimental to long-term success in order to cash in on the short-term.

Such cases are common. For some companies, restricted stock is given based on long-term vesting requirements - for example, it may begin to vest in 5 years and fully vest in 10 years. Or extended guaranteed tenure might provide the right balance of risk and reward while providing particularly strong alignment between shareholders and executives.

Want a more intense team atmosphere? Provide your employees with personal incentives and let them chase each other.

Want a more peaceful and perhaps less ambitious team? Use team motivation.

Whatever you do, make sure the incentive structure within your team serves your goals.

In 2019, Manchester United has a personal incentive policy for star forward Sanchez: he will earn an additional 75,000 pounds for each goal and 20,000 pounds for each assist. While passing is more beneficial to the team from a player's perspective, shooting may be more profitable given the difference between goal and assist bonuses.

In addition to conflicting motivations, this personal motivation can lead to divisions within the team. In October 2019, Sanchez and Pogba had an on-field dispute over who should take a penalty kick. Because Pogba earns £50,000 per goal and £20,000 per assist. Knowing their motivations, it's no surprise that they all want the scoring bonus. To make matters worse, the gap between Pogba and Sanchez's bonuses and the rest of the club's players has caused anger and dissatisfaction among teammates.

The above case explains why incentives lose their effect: many times there is a conflict between what people say and incentive signals.

You can tell everyone that you value honesty, but it won't help. To keep your word, you need to take costly actions to back it up.

If what you say is consistent with the incentives you provide, the signal will be credible and easy to understand; otherwise, the signal will be contradictory and the incentives will easily fail.

Good incentives can send a sure signal. Behavioral economists and psychologists have discovered that different signals influence the meaning we attribute to motivated behavior.

In this section, we will discuss these signals: mental accounting, loss aversion, social value incentives, honor incentives, and how to use them to achieve our goals.

(1) Incentives targeting highly salient mental accounts can lead to higher return on investment

Although it sounds outrageous, there are indeed such advertisements in reality: participating in the house viewing will give you a 1,000 yuan coupon to buy a house; test driving a luxury car will give you a 200 yuan coupon to buy a car...

Compared with houses and cars with a total price of several million or dozens of yuan, a discount of only a few hundred to a few thousand is really not worth mentioning.

Some researchers have experimented with a different form of incentive: gas cards. Although 200 yuan is not high relative to the price of a car, it becomes high when used to purchase gasoline. We earn this as a smart consumer, it just "feels" more important than a car price discount. This phenomenon is called "mental accounting." After changing the incentives, the success rate more than doubled.

The concept of mental accounting comes from Nobel Prize winner Richard Thaler, who defined mental accounting as a set of cognitive operations used by individuals and families to organize, evaluate and track financial activities.

The human brain contains multiple mental accounts, often with separate budgets. For example, housing and dining may be two separate accounts with different budgets. You may have a fixed monthly budget for eating out and a separate budget for housing, and you may be sensitive to overspending in either budget. For example, we might spend half an hour looking for a cheaper parking lot, but the money could easily be spent on drinks.

By analogy with Wi-Fi fees, checked baggage fees, etc., creating incentives around things that people don’t like to pay for can increase their effectiveness.

In summary, targeted incentives that target specific, more desirable mental accounts may be more effective than simple discounts on overall purchases.