At MagicalWasteland is an excellent essay about quality based incentives in the video game development industry. What some of the game publishers do is base the royalty and bonus payments on the metacritic scores of their games.
As Matthew writes, the producers of games looked for the elements that they believe gamers like and tack those features on to the game. They are adding complexity to the product in the hopes that it will improve it. The end result is going to be a product that is worse off than if they were to focus those efforts on finding and eliminating defects, refining the controls, and taking things out that don't work.
It reminds me of a sub shop that I worked at in college. The shop did excellent business. In the chain of 30 or so stores, our store consistently made the top sales numbers. For a long time the managers received sales based bonuses. If the store made money, they made money. Everyone was happy.
Everyone was happy until corporate hired some dolt from TGIFridays like chain who was going to take the company to the next level. We'll call this guy Jeff. Jeff convinced the owners of the company that instead of just focusing on making money that managers should be rated on how well they run their stores. A checklist was created, among the checkpionts were things like store cleanliness, employee cleanliness, inventory organization, etc. There were a bunch of items on the list that probably shouldn't have been there.
Based on this criteria each manager was rated by inspectors on monthly inspections. If they rated well, they received bonuses. If they didn't rate well, they did not receive bonuses. Sales were taken out of the picture.
What happened under this new system? Well, our roles changed. Instead of focusing solely on activities that facilitate sales we had to divert our attention towards helping the managers get their bonuses. Well, that's what they wanted us to do.
Most of us were delivery drivers. We received cash tips for good service. We wanted our managers to get their bonuses, but we didn't want to sacrifice our own money for it. If a manager asked a driver to spend a significant amount of time organizing the inventory in the walk-in cooler to get a checklist item finished, the driver would feel that they are losing out on their ability to earn. Spending time in the store is time that is not out getting tips.
Hearing the manager plead that they might not get their bonus fell on deaf ears. To the drivers, prep cooks, and cooks there was no bonus. Because the metric focused on activities that did not directly facilitate sales, there was a strong incentive for non-managers to not do their checklist work.
A friend of mine stayed with the company for a number of years. He reported that their sales took a dive and that a competitor could beat them on many levels. The company is still around, but it isn't doing as well as it did. Jeff ended up leaving for another company after the sales crashed. The company never really recovered from his plan.
What do these stories have in common? In both of them are two businesses that are doing well. They decide that quality is important and that their incentives should focus on quality and that sales are not as important. Quality is important, you can't sustain sales without it. If you try to sell a bad product to an informed set of customers, they won't respond well to it.
In the case of Matthew's story, the quality of the video games suffered because people were focused on adding extra features instead of making the existing ones good. In the case of the sub shop sales and service suffered because the managers wanted the employees to spend their time working on aspects of the business that did not directly help sales.
All systems of incentives are going to have a set of unintended consequences. Is it better to just tie bonuses to sales? It's not perfect, but it is effective at bringing in money.
If another aspect of the business is important enough to warrant providing an incentive, why not add an additional incentive without displacing the existing sales incentives?