The only thing worse than an incentive that doesn’t work is one that works all too well. Wells Fargo is just the latest company to be ethically embarrassed and financially distressed by a fiasco involving excessively motivational incentives. Thousands of employees were discharged over scandalous fraudulent practices that generated illegitimate bonuses and enriched salespeople while bilking their clients. This incident is merely the best publicized newest example of something that happens all the time, but it is important to us.
While the general public might just shrug at another set of criminal acts that can be laid at the feet of money-grubbing bankers, we in the compensation profession should take the lesson more seriously. The moral hazard problem is not industry-specific or even an issue about incentives. It strikes at the heart of our profession’s intense focus on applying rewards to generate positive output results from human resources.
Any fault lies not in capitalism but in human nature. Similar debacles involving reward system perversions occur in every kind of human enterprise in every social system on every continent. Government agencies,the halls of Congress, multinational conglomerates, non-profits, small companies, LLCs, partnerships and sole proprietorships all routinely stumble over the most basic principle of behavioral psychology: people always choose to act in ways that they perceive as best for themselves.
Any program effectively designed to generate rewards that are meaningful will tend to elicit behaviors intended to win those positive consequences. Each individual will choose:
- to perform as you desire to earn that reward,
- to ignore your offered inducement as less desirable than some other course of action or
- to take some other alternative path to attain the attractive reward.
That was simplified, of course, but you get the idea. We who do HR and compensation things are supposed to show mastery of the methodologies to create (or copy) marvelously efficient mechanisms to achieve top management objectives. On time and under budget, too.
As others have observed, good process can enhance any final incentive product. Strategic planning sessions, communications, Beta tests, focus group studies and performance audits are all basic steps that can help improve design and implementation. Precommitment agreements with honesty pledges signed at the top rather than merely at the end will create statistically significant improvement in compliance success, as well. But the final test of a viable incentive program will be its appropriate responsiveness to how the targets of the plan balance the consequences they see inherent in the situation. Employees affected by the plan might not see what you see or react they way you hope.
In one illustrative case, a State highway patrol chief asked for comments when he announced the introduction of an innovative pay for performance plan that would involve safety criteria. Part of the future pay evaluation of patrol officers would involve the traffic safety record in their area. A veteran sergeant immediately spoke up: “If I’m going to be held accountable for traffic accidents, Chief, we really need to get a stop light at Dead Man’s Corner, where I have to call for the meat wagon at least once a week.” The Chief responded, “OK, but you have covered that section for years, Sarge. Why didn’t you ever mention that before?” The sergeant answered, “Well, it was a great place to write tickets.”
Be careful what you ask for. You just might get it.
E. James (Jim) Brennan is an independent compensation advisor with extensive total rewards experience. After every kind of corporate HR and consulting role in every industry, he was Senior Associate of pay surveyor ERI before returning to consulting in 2015. A prolific writer (author of the Performance Management Workbook), speaker and frequent expert witness, Jim testified in many reasonable executive compensation cases. He also serves on the Advisory Board of the Compensation and Benefits Review.
Image by Tran Nhat, courtesy of Creative Commons