The Lollapalooza of Incentives/Biases Affecting Department Leadership


After stumbling upon this article, I have obsessively listened to Charlie Munger's The Psychology of Human Misjudgment speech. I've listened to it while I was driving, exercising, passing the time at the station, and right now.

It made me begin to ponder the incentives that are currently influencing my fire department. And the more I thought about it, the worse the incentive problem got. One of Charlie's famous quotes is, "Never, ever, think about something else when you should be thinking about the power of incentives." He goes on to say, "Perhaps the most important rule in management is: get the incentives right."


Never, ever, think about something else when you should be thinking about the power of incentives.
—Charlie Munger

Sadly, our current incentive system is at best keeping our fire department stagnant, and at worst, well, you can use your imagination. (This article was written through the lens of my department, but if we are facing these types of issues, I'm sure others are too.)


The Dilemma


One of Jocko Willink's principles is there are no bad teams, only bad leaders. And what could be a great team—my fire department—is struggling due to poor leadership. I do want to be clear here, though. I believe these are good people who can be effective leaders. Yet, the incentives they face are driving their poor performance.


Financial Incentives


I would bet that 90% of our appointed leaders are in the Defined Benefit pension. It's probably 100%, but I understand they once offered a buyout to some folks. So, some may fall into that category.


But, the pensioner's retirement livelihood is based on an average of their highest five years of pay. Therefore, he/she has an incentive to maximize his/her expected benefits. Which as a financial advisor, I approve of that! But, unfortunately, this leads us to status quo bias.


Status Quo Bias


If maximizing your retirement hinges upon maintaining your current position, what is riskier: implementing change or remaining the same? Most opt for the status quo, and this is a normal human tendency. Change is scary. It is especially frightening if the income you are going to rely upon in your elder years might be affected. Consequently, this status quo bias is reinforced by a loss aversion bias.


Loss Aversion Bias


In my department, employees are covered under a merit board. It is my understanding that once you move into an appointed position, you are no longer a classified employee. Non-classified employees can be reprimanded, demoted, or dismissed without the ability to file a formal appeal through the merit board.


All leaders have to make tough decisions and have hard conversations. Once you are a non-classified employee, your exposure to the possibility of poor outcomes with no remedial avenues increases. This causes you to focus on what you have to lose more than what might be gained. Losses hurt worse than gains.


Persian Messenger Syndrome


This drives our leaders to Persian Messenger Syndrome. Persian messengers quit passing on bad news for fear of losing their heads…literally. Being demoted or fired may not equate to being beheaded. However, the thought of missing out on thousands of dollars per year in retirement will definitely give you a headache.


When you begin to add up all the psychological forces at play, it is not surprising that the division between the leaders and the firefighters has become so great.


I don't think this division has grown too large to bridge the gap, but we must begin making progress. The old saying is true: A journey of a thousand miles starts with a single step.


I hope this article is not seen in a negative light. I have been pondering the effects of these incentives, and this is what came of it. I hope that through discussion and productive discourse, we can find solutions.


(Non-awkward segway...hopefully)


And, if you'd like a fiduciary financial partner, guide, and educator to help you define your goals, create a plan, and take action; I am here to serve.


Cheers,


Your Friendly Firefightin' Financial Planner

Forward Focus Financial Planning wants to help you communicate and clarify your financial goals so that you can create a plan and take action. Take the first step and schedule a free planning call today. You only get one chance at living a great life. Define your goals, create a plan, take action, and be confident.

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Forward Focus Financial Planning, LLC is a Registered Investment Advisor in the state of Georgia.

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