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How Loss and Avoidance Could Sink Your Company

This article is written by Erik van Mechelen based on the Octalysis framework by Yu-kai Chou.

How Loss and Avoidance Could Sink Your Company

It is hard to eliminate Core Drive 8: Loss & Avoidance from your company culture, but it should not be the main driver of decision-making.

Wells Fargo’s quota system gone wrong

Wells Fargo has been in the news for the wrong reasons. 3.5 million accounts were found to have been created fraudulently by employees. The company settled a law suit for 9-figures.

It turns out these accounts were created by employees hoping either to retain their jobs based on required quotas or to achieve better bonuses. (The company has since removed sales quotas.)

From the employees’ perspective, making the choice to do the right thing often meant they were worsening their personal financial situation (risking their job financial compensation).

There are risks in addition to benefits of implementing competition in the workplace.

From Actionable Gamification:

Adding competition-driven stress to the daily challenges that employees face can often increase the probability of burnout and skewed performance. Employees may become more motivated to make each other fail and even look for new opportunities elsewhere. In my own experiences, when people around me constantly talk about quitting their jobs, more often than not it is because of dysfunctional people dynamics between their bosses and/or coworkers, and not because the tasks themselves are too difficult.

Rank and Yank

A different effect of Loss & Avoidance emerged from Microsoft’s rank and yank program (a cousin to Jack Welch’s bottom 10% policy at GE). When managers figures out they could be replaced by people they themselves hired, they increasingly hired less skilled and less talented employees onto their teams. The managers kept their jobs, but their teams were weaker and meant that these departments within Microsoft were at risk of being outperformed by the competition outside of Microsoft.

Here, again, the managers’ realizations and desired action to keep their job meant they took ultimately undesirable actions from the long term perspective of Microsoft, which affected their business metrics. CD8 was amplified by CD4.

This problem of job security is relevant to any growing organization sufficiently large to incur threats from outside competition forcing them to bring in new people, sometimes at the expense of current employees. It is natural for people to desperately hold onto what they have.

What doesn’t make sense is when companies make policy or create incentives that will, once played out, hurt their underlying culture or business metrics in the long run.

From Actionable Gamification:

Another was Microsoft’s “Stack Racking” system, where an employee’s expectations for promotion were based on how they were ranked among their peers.

A personal friend of mine who worked at GE many years ago stated, “The Rank-and-Yank system there made sure that everyone hired people weaker than themselves so they were never in danger of being yanked. When we interviewed a brilliant candidate, we made sure they never got the job because it would put ourselves in jeopardy or potentially result in a smaller bonus.”

Peter Cohan from Forbes stated that, “[Stack Ranking] directed [Microsoft employees] to prevent their peers from getting outstanding performance reviews and brag about their accomplishments to each member of the management committee that determined their relative ranking.

What’s the solution?

Frameworks like Octalysis easily describe (and predict) this behavior at the individual and program level.

Instead of CD8 and CD4, companies need to encourage CD5 collaboration (white hat part of social influence) and ensure teams and individuals have enough Core Drive 3: Empowerment of Creativity & Feedback, especially when the company is facing difficult problems. People are natural problem solvers, and enjoy finding solutions together.

The other problem with misaligned incentives is they create distractions from other productive work. Bankers could be providing better customer service, but instead they are pushing accounts that customers aren’t asking for and don’t need. What’s more, quota systems enforce scarcity (Core Drive 6: Scarcity & Impatience), blending black hat extrinsic influences on behavior. Quotas usually combine countdown timers with a hint of the black hat half of CD5, competition. Employees compete instead of collaborating, diminishing instead of strengthening inter-office relationships.

Worse, if a company strategy alienates customers, employees on quota systems will be competing for a smaller customer base or at least an increasingly disenchanted customer base.

Loss and Avoidance is a Black Hat mixture of extrinsic and intrinsic.

When combined with something as closely associated with our identities as our job or career (Core Drive 4: Ownership & Possession), it’s effect on our decisions is amplified.

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