Trust, Motivation and “Skin in the Game”

I mentor entrepreneurs who are focused on social impact. In a recent round-table, startup CEOs shared challenges they were facing. These were typical of the difficulties startup CEOs face. I want to write about two of the challenges that were discussed the most.

One entrepreneur felt that her suppliers did not trust her but had failed to resolve the issue. Another entrepreneur felt that her employees were not motivated to pay attention to the small details that make for a better customer experience. While these appear to be unrelated problems, deeper analysis suggests the same underlying principle. I will use the shorthand “skin in the game” for this principle — the idea that partners and employees need to have “skin in the game” to be motivated to produce the best possible outcomes. Let me illustrate what “skin in the game” implies in the two challenges that I have mentioned.

Relationships between partners — supplier and buyer for instance — are governed by contractual agreements. Contingencies can arise that make it difficult for one of the partners to meet their side of their contract. For example, buyers may not be able to buy everything that the suppliers produce. On the other hand suppliers may not be able to produce the quantities needed by the buyer. Since the buyer or supplier has no information about the contingencies of the other side they begin to suspect bad faith by their partner, leading to a loss of trust. Mitigation actions like the leasing processing capacity that enables the buyer to buy more from the supplier might be possible but these do not address the underlying trust issue. The key issue is that risks are not equally shared by the buyer and supplier. If the buyer is unable to sell everything she produces, there is a missed revenue opportunity for the buyer. Similarly if the supplier’s needs are not met by the buyer. The solution to the distrust problem is for both sides in the partnership to have “skin in the game” by sharing risks. Buyers will need to commit to a minimum purchase amount — and if that exceeds what they can process they will take a loss. Likewise, suppliers should commit to a minimum supply amount — if they fail to do that they will have to compensate the buyer for the lost revenue opportunity. Sharing of risks motivates each party to take actions geared towards mutually preferred outcomes. This alignment of incentives mitigates the loss of trust.

How does one motivate employees, especially those doing repetitive tasks, to do their best? We are speaking of jobs on the manufacturing floor, frontline and back office workers in grocery stores, hotels and others. Job design has a lot to do with how employees perform. Most employers standardize repetitive tasks — spelling out how the task is to be performed — leaving employees no scope to exercise their judgment and autonomy. While monetary rewards are important, employees are motivated by intrinsic rewards too. Daniel Pink in his book “Drive” describes three intrinsic motivators: autonomy, mastery and purpose. While repetitive tasks like stocking grocery shelves and making up hotel rooms offer limited scope for autonomy and mastery, a few employers have found ways to ingrain tasks with a degree of autonomy and mastery. Employers have found that employees respond positively to flexible work schedules and freedom to choose delivery routes. Ritz Carlton gives each employee the freedom to spend up to $2000 per guest to delight their customers. A few other hotels give their workers discretion in making up rooms and encourage their workers to put their name on their work by leaving a note for the guest, “Your room was made by xyz”. Some manufacturers encourage their workers to put their name on their work product. Everyone cares about their own reputation and putting their name on a piece of work raises the stakes for them. When employees understand the impact their work has on customer satisfaction and are given the freedom to make a difference, the stakes are raised and employees are motivated to do better.

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