Xerox Built a Better Machine, but Its Pay Plan Rewarded Selling the Worse One
After serving in government, Wilson returned to find the commission plan favored the older machine.
Farnam Street · The Power of Incentives: The Hidden Forces That Shape BehaviorJoe Wilson of Xerox came back from serving in government to a puzzle he could not solve from afar.
The company had built a better, new machine. By logic, it should have sold well. Instead, the older machine outsold it.
That puzzle is one Charlie Munger, the investor best known as Warren Buffett's longtime partner at Berkshire Hathaway, liked to retell. As Munger put it: "If you’re trying to change a behavior, reason will take you only so far."
When Wilson got back to Xerox, he went looking for why. He found the answer in how the salesmen were paid.
Xerox paid its salesmen by commission, a share of each sale that goes to the person who makes it. Wilson found the commission gave salesmen a strong incentive to sell the older machine.
Munger made a broader point from stories like this one. Appeals to reason have limits. What people are rewarded for shapes what they do.
Munger warned that overlooking incentives rarely ends well. And paying attention to what the other person is rewarded for can help both sides come away ahead.
Questions people ask
What is a sales commission?
A commission is a share of a sale paid to the salesperson who made it. It is meant to encourage selling, but when the terms favor one product over another, salespeople have a practical reason to favor that product.
Who was Charlie Munger?
He was an investor and business thinker, best known as Warren Buffett's longtime partner at Berkshire Hathaway.