I've spent my life working with incentives. Knowing how they work and using them effectively has proven to be one of the most powerful forces in history. Ignoring them is catastrophic.
For me, it started early. My parents explained that if I was good, Santa would bring me presents. Unwilling to test the limits of Santa's forgiveness, I was a pretty good kid. In school, the teachers said if I earned good grades, I would be more successful. If I didn't study, I would pay the price and wouldn't be able to get a good job when I got older. (You can insert your own entrepreneurial joke about being unemployable here.)
Employees are the same way. If you incentify your sales staff with a commission on revenue, you'll get big sales numbers, but profits are not the focus. If you don't incentify your sales staff with bonus for reaching their numbers, you'll see they rarely meet their numbers. So, I've found that paying salespeople on gross profit rather than revenue, and additionally with a kicker when they reach their numbers, is a good thing.
If you are unclear about the value of incentives, you can run a simple test. Pick a really absurd idea and tie money to it. Tell your employees that every time they answer the phone on the second ring you'll give them a dollar. You'll quickly see that you're paying money every time the phone rings, because people will quickly go where the money is. If you want people to take specific actions, give them an incentive to do so -- it doesn't have to be money, but I've found it usually does the trick.
Most of you with any business experience know this. I'd even say that most people without business experience know it too. Which begs the question -- why hasn't our government figured this out? The prevailing wisdom (if you can call it that) in Washington now is that the best way to stimulate the economy is to give the average person $500. The theory is that it'll give people money to spend, they'll put it into the economy, and we'll bounce back.
But the theory is flawed. While it may be admirable to give people money, it won't stimulate the economy. Most of it will be saved, and what's left won't be enough to create jobs. We'll just add more to our deficit and still be in a tough spot. We'll also be teaching people to expect handouts from the government. The incentive is to reach out a hand and expect someone else to take care of you. Not a worthy lesson or behavior to teach. Remember that this money has to come from somewhere. (If you haven't read Atlas Shrugged, now would be a great time to do so.)
One point we can all agree on is that jobs are the cornerstone to any sort of meaningful recovery. If that's the case, why not incentify business to hire? Why not give a tax break to the people who can actually create a change? If I were to pay less in taxes, I would invest that into the business. It would go to hire more talented people. They'll produce more, create more, and generate more income. These new employees will enter the workforce and spend their money on rent, food, and hopefully even a little savings. But the dramatic impact of a new job is much more meaningful than a simple handout from the government -- one that we'll all have to pay for. A tax break for employers would incentify me to hire and incentify people to get work. And a paycheck beats a one-time $500 check.
It's time to start using incentives to get what we want. Do we want more people to become dependent on handouts from the government (and our future)? Or do we want to teach people that creating jobs and wealth is better for everyone? In your own business, make sure that you use the right incentives to create the right behaviors, and encourage your government to do the same. It's the single best path to success -- and ignoring it is a path straight to failure.