Amazon CEO Jeff Bezos announced a “Pay to Quit” program in a letter to shareholders. New employees are offered $2,000 to quit and that increases $1,000 a year, up to $5,000.
On the surface, the move seems completely bizarre. Companies in America don’t need to pay employees to quit; employment-at-will means they can fire workers. And Amazon cannot merely justify the move as a goodwill measure because it is a publicly-traded company, one that is supposed to maximize profits for shareholders.
So what’s going on? My gut reaction is this was a peculiar policy. However, after thinking about the game theory, I came around to the viewpoint this is a fairly brilliant move.
Commitment devices
Every year millions of Americans resolve to lose weight, quit smoking, or spend less money. But within a few weeks or months their motivation wanes and they return to old habits. There are many reasons people fail. One of the issues is the incentives: changing habits is hard, and it is just to easy to give up.
One way to change the game is to use a commitment device, a means of locking one into a course of action. The goal is to make failure costly or unavoidable. A simple method is to add small obstacles. A dieter looking to cut down on snacking might commit to buying 100-calorie snack packs instead of bulk packages. The additional inconvenience of opening more snack packs makes one more conscious of snacking and might reduce temptation. A second commitment device is making failure public. If one has a dieting buddy or support group, then the cost of failure is admitting failure to the group, which is often encouragement to try harder.
A third category of commitment devices is more inventive. Commitment contracts artificially add a monetary cost to failure. A dieter might create a contract to pay $1,000 if a weight loss goal isn’t met. Such a contract can be created and enforced on the website stickK.
Commitment devices are meant to raise the cost of failure in the future to encourage better actions in the present. And this might be what Amazon has in mind with “Pay to Quit.”
Committing employees to work hard
It is noteworthy that Amazon does not offer the “pay to quit” program to all employees. The offer is made to employees in warehouse facilities, who often face a grueling work pace.
Employees face a commitment problem just like a dieter. They may plan to try hard, but the constant grind makes it easy to lose motivation. So how can Amazon encourage people to commit to working hard? Pay them to quit!
Here’s the logic. Amazon offers employees a chance to leave. People who do wish to find other work–the ~10 percent of employees who take the offer–are encouraged to do so. The employees that stay have mentally committed to the position. In fact, all employees know this. So if one person starts complaining, other employees won’t commiserate–they might suggest that person should take the money to leave.
The commitment idea seems to have worked for Zappos, a subsidiary of Amazon whose similar policy inspired the idea.
Hiring good employees
There is a second reason “Pay to Quit” works as a commitment device. Amazon knows that it is offering $2,000 for new employees to quit. This means there in extra pressure on HR to hire people that actually will fit with company culture, or else the company faces a $2,000 penalty. Thus, “Pay to Quit” program raises the cost of failure to hiring bad employees, in the hope that HR identifies hire good employees from the start.
There’s an old saying that a penny saved is a penny earned. In Amazon’s case, we coin the new dictum: a problem avoided is better than a problem solved.
I thought of another reason that I’m surprised you didn’t mention. Increasing the amount each year might be an incentive for someone to stay longer, knowing they’ll get more if they stick it out.
Good point, I completely forgot about how the incentive increases each year.