The Cobra Effect and Incentives: How to Create the Best Plans


By Wayne Rivers, Family Business Institute

One of the most famous examples of the law of unintended consequences comes from Delhi, India, under British rule.

The authorities thought that there were too many poisonous cobras in the city which presented a public health hazard. So, they came up with a plan: They offered a cash bounty for every dead cobra. India at that time was a very poor country, and people viewed this bounty program as an entrepreneurial opportunity.

Before long, they were killing cobras and were raking in the money. As you might expect, the snake population went down. The entrepreneurs reacted to this development as entrepreneurs do; they started breeding cobras in their homes! They would then kill the baby cobras, present them to the authorities, and collect their bounties.

Eventually the British scrapped the bounty program because it had become TOO EXPENSIVE. With the bounty program abolished, people had no more incentive to breed dangerous cobras, so what did they do? They released them into the city, and Delhi ended up with more cobras at the end of the bounty program than they had at the beginning.

That's a heck of an unintended consequence!

Why is this tale important to construction company leaders?

There are many, many ways that unintended consequences rear their heads in the construction business. One of the most common has to do with incentive plans.

Incentive plans are really, really hard to get right! For example, a common incentive plan is to reward a project manager for bringing in his/her projects on time and on budget. That sounds like a simple, effective program.

But what's wrong with it? What might the unintended consequences be? 

First, the company could lose money during that period, and yet a PM who brought her jobs in successfully could receive a huge bonus. That doesn't make sense; the company is underwater at the end of the year and yet it pays out tens or even hundreds of thousands of dollars in bonuses.

Second, a project manager may be eligible for a nice bonus, but what about the rest of the team that helped that PM achieve her success? What about the project executive, the superintendents on her jobs, and the administrative team? A third problem could be hoarding of resources. If project managers are incentivized to get their assignments done on time and on budget in order to earn bonuses, they'll want to bring all resources to bear on their specific projects to be assured of getting the incentive pay. That may lead to hoarding of resources at the expense of other jobs and PMs. These are real life unintended consequences.

All right then, just what is the best incentive program?

The answer is not one that contractors want to hear – mainly because it takes extremely hard work, a long period of time, and careful planning to make it materialize. The very best incentive program is to have a great company with a great, intentionally engineered culture.

Achieving this outcome requires a relentless focus on people, defining your company values and actually living them, and having a great strategic plan that is continually communicated up, down, and throughout the organization. It's having a CEO and other senior leaders who see the big picture, focus on their highest and best uses, and avoid micromanagement. It requires a long-term viewpoint from all the leaders of the company.

Putting all this together is absolutely the best incentive program a construction firm can have. If you have all these things – an intentionally engineered culture, focus on your people, and a compelling vision supported by a strategic plan that everyone in the company buys into — the need to create monetary or other short-term incentives goes away because you’ll have inspired people. 

Now, let's say that you absolutely insist that you want an incentive plan that's more “dialed in.” That's fine. Just make sure that your plan is heavily weighted towards the overall success of the company, not towards the success of any one or a small group of individuals. The overall success of the company must come first and be everyone’s goal because, at the end of the day, you’re all in it together.


Wayne Rivers is the president of The Family Business Institute, Inc.  FBI’s mission is to build better contractors!