In June 1992, California regulators moved to revoke the repair licenses of all 72 Sears auto centers in the state. Undercover agents had brought in cars for simple jobs. Sears oversold repairs 90 percent of the time, by an average of $223 per car. The cause the state pointed to was a pay plan Sears had introduced three years earlier.
Following the incentives means explaining behavior by what a system pays, promotes, protects, or praises people for, before trusting what anyone says they want. Stated goals are cheap to announce. Commissions, quotas, review criteria, and blame rules shape what people do every day, often in ways nobody planned.
Sears paid for repairs sold, and got repairs sold
The California Department of Consumer Affairs ran an 18-month undercover investigation. According to the Los Angeles Times, the department linked the overcharges to Sears’ decision to cut employees’ hourly wages and pay them commissions. The complaint, as reported by the Chicago Tribune, said employees had to “sell a certain number of repairs and/or services during every 8-hour work shift.”
Within two weeks, chairman Edward Brennan announced that Sears would drop commissions for auto service employees and its controversial quotas. Sears kept denying the state’s allegations. It did admit, in the Times’ later account, that its incentives “created an environment in which mistakes did occur.” By Sears’ own figures, the scandal was costing about $700,000 in lost revenue a day nationwide. Sears settled with the states that September, according to The Washington Post.
No memo had to tell anyone to cheat. Once pay depended on repairs sold per shift, recommending one more repair was the best move for each employee.
| Layer | At Sears auto centers |
|---|---|
| What the company said | Customers get trustworthy service |
| What it measured | Repairs and services sold per shift |
| What it paid for | Commission on each sale, with lower hourly wages |
| What happened | Unneeded repairs in 90 percent of undercover visits |
| What fixed it | Removing the commission and quotas |
Behavior follows pay, and rules follow whoever wrote them
Three ideas sit underneath the Sears case.
- Behavior is the shadow of incentives. People act the way the system rewards. A slogan costs nothing; the monthly review is what gives orders.
- Rules carry their authors’ interests. Douglass North described institutions as “the rules of the game in a society,” and his book on institutional change argues that they create an economy’s incentive structure. Those who write the rules can tilt that structure.
- Lasting inefficiency usually serves someone. When everyone seems to lose, check who is collecting.
Charlie Munger made the same point in his 1995 talk, “The Psychology of Human Misjudgment”: “I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it.” His favorite example was FedEx. The night shift could not finish sorting on time while it was paid by the hour. Once it was paid by the shift, the problem went away.
For the theory behind reward and motivation, see incentive theory.
Three ways a target turns against its goal
- Goodhart’s law. When a measure becomes a target, people find the cheapest way to hit the number. Goodhart’s law covers how metrics drift from what they were meant to track.
- The cobra effect. A bounty meant to reduce a problem pays people to produce more of it. The cobra effect covers the famous bounty story and its lessons.
- Quota pressure. Sears is the pattern in miniature: a sales quota plus a commission turned advisers into sellers of unneeded work.
Economists call the opposite case incentive compatibility: a design where people pursuing their own interest also produce the outcome the designer wanted. The broader field, mechanism design, earned Leonid Hurwicz, Eric Maskin, and Roger Myerson the 2007 economics Nobel. James Buchanan’s public choice theory applies the same lens to politicians and officials: budget for self-interest instead of virtue.
Before you set any target, ask what the laziest way for the most reward-hungry person to hit it would be.
A three-step routine for any absurd rule
1. Separate what is said from what is measured
| What to split out | What to look for |
|---|---|
| What they say | Slogans, culture decks, press statements about mission or the common good |
| What they measure | KPIs, commission rates, voting rules, who signs off, who gets blamed |
A company says it rewards innovation. Ask who carries the blame when an experiment fails, and whether someone who only executes the plan can still score well.
2. Trace six kinds of flow
- Money: where cash enters, and whose pocket it lands in.
- Authority: who gains decision rights, sign-off, or a veto.
- Reputation: who gets the credit and the moral high ground.
- Position: who gets promoted or a larger scope.
- Safety: who absorbs the risk when it goes wrong.
- Attention: who gets visibility and the right to tell the story.
Behavior migrates toward wherever these pool. The power-dynamics guide maps the authority and access flows in more detail.
3. Ask who would lose
Imagine the absurd situation gone and the process fully efficient. List who is worse off in that world, then ask whether they have enough power to block the change. A paper approval process that survives a decade of complaints often protects the office whose job is to stamp it.
Apply it: helmet laws nobody enforces
Many places have a helmet rule for mopeds, e-bikes, or scooters that is rarely enforced on an ordinary day. The incentive lens explains it without assuming anyone is lazy. This is an analysis of typical pressures; it does not describe any one police force.
- Cost is high. Riders are numerous and fast, and every stop takes officer time and paperwork.
- Payoff is low. Fines are small or replaced by warnings, and aggressive ticketing of commuters and delivery workers creates friction.
- Risk lands on the officer. A viral confrontation hurts a commander’s record more than quiet inaction does.
The law can still do a job on paper. If a rider is injured without a helmet, the rule shows that the authority set a standard. Enforcement then tends to arrive in waves when outside money or targets appear. US “Click It or Ticket” seat-belt mobilizations, for example, pair federal funding with concentrated enforcement periods.
| Behavior | Stated reason | Underlying incentive | Result |
|---|---|---|---|
| No routine enforcement | ”Education over penalties” | Costly, low return, easy to get blamed | Selective enforcement |
| The law stays on the books | ”To protect lives” | Shows a standard was set | Rule lives on paper |
| Sudden crackdown | ”Special safety initiative” | Grant money and quarterly targets | Short burst, then back to normal |
When following the incentives backfires
- You turn it into cynicism. Incentives explain a lot, not everything. Values, identity, and habit also move people, sometimes against their pay.
- You ignore how money changes the meaning of a rule. When Haifa day-care centers fined late parents, lateness rose. The fine read as a price. Second-order thinking covers that case.
- You stop at the first incentive you find. Most situations have several. Check whether a second one, such as blame avoidance, explains the behavior better.
- You treat a structure as a confession. An incentive shows what a system rewards. It does not prove any individual acted in bad faith.
Questions
Where does “follow the money” come from?
It is best known from the 1976 film All the President’s Men, about the Watergate investigation. The line became shorthand for tracing who benefits.
Isn’t this a cynical way to see people?
It is a way to see systems. Most people respond to the rewards and risks they face. Seeing that clearly makes blame less personal and design more useful.
How do I design a better incentive?
Reward the outcome you want, measured in a way that is hard to fake. Then ask how someone could hit the number without delivering the outcome, and close that path before launch.
Your 5-minute incentive check
The rule or behavior that looks absurd:
What people say it is for:
What is actually measured or paid:
Who gains money, authority, safety, or credit:
Who would lose if it were fixed:
One small change to the payoff itself:Pick one rule at work that annoys you, then run it through Daily Read before you complain about it.