Incentive Compensation That Works

This website recently featured an essay by Henry Mintzberg arguing that executive bonuses don’t work and should be scrapped.  But that doesn’t mean all kinds of incentive compensation are ineffective. 

Last month, a team from the MIT Media Lab’s Human Dynamics Research Group  won a contest sponsored by DARPA– and in the process, demonstrated the effectiveness of a very different kind of incentive compensation system: one leveraging the power of social networks.

DARPA (the U.S. Defense Advanced Research Projects Agency) sponsored a contest with a

Sandy Pentland, MIT Media Lab

Sandy Pentland, MIT Media Lab

 $40,000 prize to the first team that could correctly identify the locations of 10 red weather balloons around the U.S.  The winning MIT team, which included Professor Alex (Sandy) Pentland, who heads the Human Dynamics Group,  used social networks and the following incentive compensation system: If the team won, each person who had joined the team and correctly identified a balloon won $2000  — but if someone had referred that person to the team, the referrer also got $1000. And whoever referred that referrer got $500….and so on, with any balance going to charity.

The result? People were motivated both to look for the balloons themselves and ask all their friends to look. Interestingly, the Georgia Tech team that came in second also used an interesting incentive approach that aimed to inspire people to join the team: It offered to donate all the prize proceeds to the American Red Cross.