Whatever the cause, the brain can be deceptive. In its evolution, it has developed some bad habits. In helping us make decisions, our brain is not always reliable.
Insights from behavioral economics have been used to explain bad decision making in the business world. Let’s look at a few insights about how that might play out in Compensation.
1) Status Quo: We would rather leave things as they are with no change. One explanation for status quo is aversion to loss—we’re more fearful about the risk of loss due to change than we’re excited by the prospect of gain.
--- Compensation example: You have looked at the history of actual sales commission payouts and found that in the past 5 years 90% of salespeople have been paid commissions at quota or higher every year. This indicates sales goals are too easy. You recommend goals be made more difficult --- along with the upside of making more commission. But the VP, Sales is very protective of his people. He afraid to "rock the boat". He says--- “I don’t want to upset them. Everything is working fine now. Leave well enough alone.”
2) Sunk Cost Effect: "Throwing good money after bad." Because it is human nature to want to avoid failure, we will often continue spending time, effort or money to try and fix what isn’t working instead of cutting our losses and moving on.
---- Compensation example: You are in the middle of implementing a new benefit plan. Since starting the roll-out, your counterparts from other companies as well as Consultants have shared some negatives about it that you didn't uncover in your research. It might make offering this benefit more trouble than it’s worth. Your company budgeted $200,000 and you have already spent $175,000. You decide to continue implementation anyway. Backing out at this stage would cause a write-off of $175,000 and besides that your employees want it. You’ll just have to deal with problems as they arise and hope that none are "show-stoppers".
3) Confirmation bias: We have a tendency to seek out opinions and facts that support our own beliefs. This usually goes hand-in-hand with biased evaluation, which leads to a quick acceptance of evidence that supports our beliefs and a quick rejection of contradictory evidence. Confirmation bias can cause us to miss seeing important pieces of information. This can become critical when the person with confirmation bias happens to be in top management where decisions are made that affect the entire company.
--- Compensation example: The CEO recommends building 360 degree feedback into the company’s performance appraisal system worldwide. He’s read articles and had conversations with his CEO counterparts in other companies and is convinced it works. You suggest that it might not be appropriate in countries such as Japan or Korea for cultural reasons. He has never heard of cultural issues being a problem. His counterparts never mentioned it. You provide him with articles showing the risks. He says the authors aren’t “experts” like those whose articles he has read. He basically tells you to back off ---he’s sure management in Japan and Korea can handle any problems that might arise.
It’s rolled out worldwide and it’s a flop in Asia. Instead of reexamining all the evidence, he continues to believe it works --- and blames management in Asia for the problems.
Understanding some of the brain’s flaws won’t prevent us from making poor decisions, but it may help reduce the chances.
What do you think? Do you have an example of a poor compensation decision that was caused by a brain gone “haywire”?
Jacque Vilet, President of Vilet International, has over 20 years’ experience in Global Human Resources with major multinationals such as Intel, National Semiconductor and Seagate Technology. She has managed both local/ in-country national and expatriate programs and has been an expat twice during her career. Her true love is working with local national issues. Jacque has the following certifications: CCP, GPHR, HCS and SWP as well as a B.S. and M.S in Psychology and an MBA. She belongs to SHRM, Human Capital Institute and World at Work. Jacque been a speaker in the U.S., Asia and Europe, and is a regular contributor to various HR and talent management publications.