Temporal Discount or Pay Avoidance?

The Wimpy Grift: “I’ll gladly pay you Tuesday for a Hamburger today.”

In the classic Popeye cartoon series, Wimpy played Popeye’s pleasant and dedicated friend who spoke quietly and ate a big meal. He was often heard asking for others to spot him the cash to buy a hamburger. There is no record of anyone ever receiving repayment.

Temporal discount is a critical but often unknown component of every incentive plan. The term from the world of behavioral economics refers to an often subconscious discount based on the time you must wait or risk you must face before your receive something. The longer the wait, the deeper the discount. The bigger the risk of non-receipt, the deeper the discount.

A well-designed incentive plan must account for this in several ways. There must be a way to more than make up for the time and risk, for example, a leveraged upside. There must be an understanding of why the time and risk exist. This is achieved through strong communications. Most importantly, there must be a clear understanding that the value will actually be delivered if the time period is exceeded, and risk avoided. This is where the Wimpy Grift comes in.

The grift can come in many flavors. The most common is the promise of an incentive plan or pay increase that never seems to occur. We are all busy. Every business has a list of very high priorities that can get in the way of fulfilling a compensation promise. Unfortunately, the delay increases the temporal discount. At some point, the future value of the promise has no value at all. Even the best incentive plan cannot fix this issue once it is a reality.

Another common example is an unachievable goal. In our zeal to create incentive plans that ensure performance, we can design plans where the “target” goal is never met. After a few occurrences of this, plan participants just begin assuming that they will never receive the program's full value. This leaves you with the tasking of raising the potential payouts to offset the discount or losing staff members to better-equipped competitors.

In both of the very common examples above, the fix is easier and less costly than the problem. You must factor in the impact of temporal discount when measuring the impact of an incentive plan. This is very little difference between a plan where the goals are unattainable and simply not having a plan at all. They are both insincere or empty promises and have zero value to the participant.

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He works as Managing Consultant for FutureSense. Dan is also a leading expert on incentive plans and equity compensation issues. He has written several industry resources including a resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or follow him on Twitter at @DanFutureSense.

Comments

[E. James (Jim) Brennan]

Loved the new piece, Dan! I called one of those outcomes "rotten equity" in a September 2010 article here entitled "New Words for Old Issues".

"Rotten equity: Delivering fair or equitable treatment so late and obviously unwillingly that any positive motivational opportunity has been spoiled and converted into negative resentment by the recipient. A rotten hiring bonus is paid six months after hire; a rotten relocation expense reimbursement is made a year after you took out a loan to pay your overdue moving bill supposedly covered by your employer."

Thanks for elaborating on the dysfunctional practices we so often encounter in real life.