Why your incentive scheme is (most likely) wrong

If you have been reading my content and following me on LinkedIn or on my website ssedgwick.com, you will be aware that I am an active proponent of organisations committing to a purpose beyond profits and living by their values, rather than using them as surface-level marketing buzzwords. I strongly believe that this approach harnesses the discretionary energy of employees and leads to a successful, high-performing, and enjoyable organisational culture.

However, the culture and supporting values of a company are only one part of the puzzle. The structure and processes of an organisation must also be engineered to maximise that culture and achieve their strategic intent.

There is no more damaging structure to an organisation’s success than a poorly considered and implemented incentive scheme. If you, like some others, disagree with me and believe that “culture” is an intangible wishy-washy notion or perhaps you struggle to define exactly what culture means, then perhaps this will pique your interest.

When you boil it down, incentives are what motivates staff to produce the effort to achieve an outcome. There are extrinsic motivators such as compensation incentives (bonus, stock options, raises, profit-sharing etc.) and then there are more intrinsic motivators such as recognition incentives (certificates of achievement, awards, accomplishment announcements etc.). My focus in this argument is compensation incentives, particularly performance bonuses.

If you ask any typical CEO or business leader what the purpose of their organisation is, they will likely state a phrase containing one or more of the following: “innovation”, “customer success”, “value creation”, “growth”, “social impact”, “passion”, “sustainable”, “positive outcomes” etc.

Herein lies the problem. Performance bonuses, particularly in sales teams, are customarily geared towards monthly, quarterly, and annual revenue targets. The compensation incentives and associated key performance indicators (KPIs) are in no way geared towards any of their lofty purpose statement catchwords. Nor are they geared towards doing what is best for the organisation in the long-term.

For a particularly poignant example of incentives-gone-wrong, consider the most devastating cyber-attack in history, NotPetya, and its effect on the shipping giant Maersk. This statement is from an anonymous insider in the organisation, “the security revamp was green-lighted and budgeted. But its success was never made a so-called key performance indicator for Maersk’s most senior IT overseers, so implementing it wouldn’t contribute to their bonuses. They never carried the security makeover forward”. The aforementioned “security revamp” was scheduled to be completed before NotPetya destroyed their IT infrastructure and cost them close to half a billion dollars…. Ouch.

Could you imagine if an organisation’s stated purpose actually reflected what their employees were incentivised to do? “Company A is committed to growing our revenue, at the expense of all else.” I think it might be difficult to win customers and motivate or even retain employees with a purpose such as that. But that is EXACTLY the message that is being sent when you engineer your incentive structures for short-term revenue goals.

Speak to any project (whether product or service-based) delivery team and they will freely admit (perhaps after a couple of drinks) that their internal sales team promise customers the world, lower prices to win work to such a degree that the delivery team’s profit margins are in the toilet, and then expect the delivery team to, well, deliver on those promises. This perverse incentivisation leads to communication breakdown and siloing of effort because both teams have different and oft-competing incentives. If your organisation is actually committed to “customer growth” and “positive outcomes” then why aren’t your staff incentivised to achieve that very aim.

Ineffective incentive structures are evident in a company’s relationships with its customers and staff. You will find such companies often have to revert to the contract in its dealings with customers and the persistent arguments about who is living up to their part of the bargain is a never-ending quagmire of pervasive negative consumer sentiment. Staff are typically unmotivated for anything that does not benefit them personally and are so inwards-facing that they are unwilling to accept any risk to the warm little cocoon of bare-minimum effort and complacency they have built for themselves. Monthly and quarterly revenue targets are their sole concern. You will see things such as rounds of applause being given during meetings when sales targets are met, yet there is silence regarding their ever-worsening customer Net Promoter Scores (NPS) and subsequent blown-out budgets and timelines. You will hear statements from staff, behind closed doors, such as “I am just waiting until I reach ten years so I can get my long-term bonus and long service leave, then I am out of here”.

Another real-life example of perverse incentives is from Safi Bahcall’s new book Loonshots, “In the 1960s, the Ford Motor Company was desperate to compete with smaller, cheaper cars from Japan. So, the CEO announced an exciting stretch goal: the company would produce a new car that would cost less than $2,000 and weigh less than 2,000 pounds—the Ford Pinto. The goal and tight deadline, unfortunately, did not leave much time for safety checks. The fuel tank was placed just behind the rear axle with only 10 inches of crush space. The design flaw, as lawsuits later showed, led to a less-than-desirable new feature: on impact, the car could blow up.”

Is this type of environment or behaviour striking some chords with those reading? I am sure some of it is familiar to you.

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Now for the denouement! I promise it is not all doom and gloom and coruscating attacks on a deficient commitment to values. I have the medicine! Although, to implement the solution will take significant structural changes to compensation and incentive schemes, and those who are most comfortable with the status quo will likely lash out and rail against these changes. That is a sure sign you are making the right changes.

I submit that an organisation’s sales, delivery, marketing, and other business units should ALL be incentivised by project success. What do I mean by project success? I define project success as a concinnity of the following measurable outcomes:

·     Customer satisfaction pre, during, and post-project (NPS)

·     Employee engagement and morale

·     Profit margins

·     Customer success (what this means should be pre-agreed prior to project commencement)

·     Delivery within scheduled timeframes

·     Quality assurance

·     Maintenance of scope (don’t draw outside the lines!)

When all staff are incentivised to achieve the above outcomes, an increase in new customer wins and increased revenue will follow. Except, with this approach, you will also enhance customer satisfaction, elevate teamwork and collaboration, create a positive impact, and all without sacrificing profit margins. You will be, in fact, living up to your stated values and purpose.

There is no such thing as a flawless incentive scheme and despite most incentive structures being well-intentioned, you can see how they can motivate the wrong type of behaviour. Consider what your company’s incentives are promoting and what the most likely adopted behaviour of your staff will be. Adjust accordingly.

Put simply, you can’t motivate your staff solely by revenue targets. Making money for someone else will not engage them beyond bare-minimum effort and it will erode relationships with employees and customers. It also sends a clear message that your purported values and purpose are embellished misrepresentations and that inevitably destroys trust. Look beyond revenue. You might find you like what you see.

Purpose is not the sole pursuit of profits but the animating force for achieving them. Profits are in no way inconsistent with purpose — in fact, profits and purpose are inextricably linked.” – Larry Fink – CEO of Blackrock

Dumb and Dumber: A Study of Management and Decision-Making Structures

Anyone born before the early 1990s is likely familiar with the comedy film Dumb and Dumber, starring the geniuses that are Jim Carrey and Jeff Daniels. If you have not seen the movie or need a refresh, I will give a brief synopsis. Lloyd Christmas (Jim Carrey) and Harry Dunne (Jeff Daniels) are best friends who discover a suitcase full of money after Mary (Lloyd’s eventual love interest) leaves it in Harry’s limo. They decide to travel to Aspen, Colorado to return the briefcase, unaware their lives are in danger because the money is connected to a kidnapping. Harry and Lloyd travel across the country while pursued by assassins and police, to return the money and find love. Hilarity ensures from start to finish. Caught up now? Good.

Arguably one of the funniest scenes in the film is when Lloyd goes to get “the bare essentials” with the last of their money and is subsequently robbed by a “sweet old lady on a motorised cart”. Watch below for the full scene.

Let’s consider Harry and Lloyd’s situation from a management point of view.

Their mission (the WHAT) is to return the money and find Mary. Their strategy (the HOW) is to travel cross-country using the money they are supposed to be returning to cover the necessary travel expenses. Their Purpose (the WHY) is to make us laugh.

Through careful analysis of the above case study (watching it while eating a bag of Kettle chips), it is evident that Harry and Lloyd employ decentralised management and decision-making structures. They operate in a flattened hierarchy where each is trusted with making decisions that are made towards their common goal or mission.

The benefits of decentralisation include flexibility, increased morale, development of expertise, resilience, individualisation, and the ability to process information faster and more accurately. By employing a decentralised management structure, Harry and Lloyd promote recurring values of “success through trusted friendship” and “stupidity”.

Another benefit of a decentralised organisational structure is the granting of greater autonomy and trust. Harry and Lloyd are empowered to use their knowledge (limited as it may be) and experience to innovate and implement their own ideas into their workflows.

However, like all decentralised organisational structures, there needs to be a clear understanding of the mission and a framework/structure for effective and timely decision-making, ensuring it is aligned with the overarching mission, and not exceeding the capacity of the individuals or teams. Here is where Lloyd and Harry come unstuck. It is clear from the above scene that Lloyd’s and Harry’s definition of the strategy and “bare essentials” is not aligned. Lloyd, if he were not robbed by the sweet old lady would have returned with an oversized cowboy hat, a ball and paddle, sparkly paper pinwheels, and a box full of assorted accoutrement (likely booze). This evidently would have contributed little to their mission. There was a breakdown in communication due to a lack of an agreed-upon decision-making process.

If there is a clear understanding of the team’s (or organisation’s) mission, this allows leaders to delegate decision-making to individuals and teams with the implicit trust that the decisions made will be with the intent of achieving the mission. Studies have proven that the more complex an organisation is, the more they must employ a decentralised organisational chain of command, to aid in rapid decision-making and easing the burden of their leadership. Quite clearly, Lloyd and Harry are in a complicated situation. The negative consequences incurred from their lack of an effective decision-making process could have been avoided had they agreed upon what defined “bare essentials”. Additionally, had a policy been implemented that gave clear boundaries for decision-making in unforeseen circumstances (i.e. locking your wallet in a newspaper vending machine), the negative outcome (robbery) could have been avoided.

Harry and Lloyd, through the employment of strict data-driven evaluation of new environments and ideas, could have created an effective blend of both centralisation and decentralisation. Centralisation of mission and purpose, and decentralisation of management and decision-making. As research has proven, individuals given the trust and tools to make decisions and innovate, are far more likely to be successful if the mission and purpose are clearly communicated and understood, and a strict decision-making structure is implemented, allowing for rapid and accurate decision-making in what is an increasingly evolving and uncertain world.

The trust placed in each other through a decentralised management structure and the reliance on rapid and accurate decision-making via a structured framework would give Harry and Lloyd the ability to move with speed, accuracy, and surprise to maintain their competitive advantage. We can learn a lot from Harry and Lloyd.