Leads with the quote:
“I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. Never a year passes that I don’t get some surprise that pushes my limit a little farther.” — Charlie Munger
- The restaurant industry has high turnover because its incentives lead owners to fire employees quickly, and thus attract talent that is not loyal and often has underlying emotional or behavioral challenges.
- Case studies are often the most valuable way to learn in ill-structured domains. This is a central idea of Cognitive Flexibility Theory. He thus presents case studies of incentives within F&B business.
- Context: major costs within F&B business are rent, ingredients, and labor. Thus if not doing well you either need to increase sales or decrease labor costs. Rent and ingredients are not discretionary.
- Case: Anthony Bourdain’s Kitchen Confidential story of a friend who fired a disruptive worker who then killed himself illustrates the emotional and behavioral distress common in the industry.
- Case: Fave’s experience selling to Southeast Asian hawkers illustrates the importance of having an “eyes light up” moment in sales pitch, and that moment for them came when realizing they could increase customer loyalty by collecting a phone number in sales flow.
When staff costs exceeded 30% of the previous night’s revenue, you know that you’ve either hired too many people or you’ve collected too little cash.
There are two ways to read this excerpt. The first is “holy crap, what an industry, Bourdain has truly been through some crazy shit” and the second is “this is totally normal, it is the end result of a set of systemic incentives; it’s no accident you get people like these as staff.”
I think some of these things are obvious — like the three buckets of costs, and how they affect restauranteur behaviour — but then the second and third order effects of those incentives aren’t as obvious to most people unless you’ve thought deeply about the industry, tried running a restaurant for a bit, or tried selling to F&B businesspeople for some period of time.
a small handful of structural features explained a great number of things: the difficulty of hiring in the industry, the staff turnover numbers, and finally: the nature of selling successfully to such businesses.
- Understanding core incentives of industries can help you identify outliers — orgs that behave differently than the norm. Outliers can come from inexperience, playing a different game (e.g. money laundering), or from having designed a unique set of incentives.
- Case: food stalls in Southeast Asia that offered high levels of wait staff and took cash payment for drinks were rumored to be money laundering operations
- Case: Union Square Hospitality Group (USHG), a large restaurant conglomerate that includes Michelin star restaurants and Shake Shack (run by Danny Meyer), designed complex incentives that attracted and retained high skilled employees.
- Insights on this were articulated by Susan Sontag, an organizational behavior researcher.
- Case: food courts in Singapore focused on cost reduction rather than upsell. Their model supported this deviation from common F&B incentives because of high scale, premium locations in malls, and collecting payment directly (rather than allowing stall operators to do so).
- Incentive Design relates to Organizational Behavior
- Susan Salgado - phD in organizational behavior, NYU school of business — wrote Fine Restaurants: Creating Inimitable Advantages in a Competitive Industry
Occasionally, what you’ll find at the other end of that variant behaviour is a money laundering operation. Other times you’ll get a wonderfully designed set of interlocking incentives. But in just about every case I’ve seen, you’re guaranteed to find a very interesting organisation indeed.
Three key practices: selection of employees based on emotional capabilities, respectful treatment of employees, and management through a simple set of rules that stimulate complex and intricate behaviours benefiting customers (emphasis mine).
- Well-designed incentive
- Case: The Overlook Fund instituted a cap on subscriptions that aligned their incentives with investors’ for fund performance instead of simply growth of assets under management. This created many advantages for them but imposed a higher bar for them to meet for capital-weighted-return than others in the industry who operated on the more standard “2 and 20” model.
One of the more obvious ways to talk about incentives is to go “if only X would do so-and-so, with such-and-such incentives, and we’d have better outcomes.” e.g. “if only wait staff were paid in such a way that aligned incentives with the business; we’d get better F&B service.”
It’s often the case that when you find some interesting set of incentives, you’d also find a web of interconnected systems that underpin and enable them. … Incentives tend to be difficult to copy for one of two reasons. First, the incentive incurs some cost. Second, the incentive depends on some organisational structure that’s more difficult to build.
- Richard Lawrence, Overlook fund, created cap on a whim. Wrote The Model. Provided lasting benefits.
- Benefits of “Cap on Subscriptions”
- Lowered cyclical volatility
- Provided backlog of investors
- Incentivized long-term commitments from investors