Are your incentive plans working for you, or against you? Do you really know? Every business leader needs to question the incentive plans they have in place or are considering. For starters, you need to ask yourself,
- Are the incentives achieving the right behaviors?
- Are there any short-term or long-term consequences tied to the incentives?
- Are the incentives fair?
- Are the incentives really needed to achieve the desired outcome?
If you’re a regular reader of this blog, you’re possibly aware of my concerns, and their connection to Silent Problems. Last week I came across an interesting artice over at Business Week that takes another stab at this important topic. It states:
“The inescapable flaw in incentives, as 35 years of research shows, is that they get you exactly what you pay for, but it never turns out to be what you want. The mechanics of why this happens are pretty simple: Out of necessity, incentives are often based on an index of the thing you care about—like sound corporate leadership—that is easily measured. Share price is such an index of performance. Before long, however, people whose livelihoods are based on an index will figure out how to manipulate it—which soon makes the index a much less reliable barometer. Once share price determines the pay of smart people, they’ll find a way to move it up without improving—and in some cases by jeopardizing—their company.”
“Incentives don’t just fail; they often backfire.”
Bottom Line: Many companies and their boards must question their incentive compensation plans, and ask this important question. “Are incentive plans you have in place an asset, or a liability?”
What do you think?
The only problem with these types of articles (the BW one not yours) are the doom/gloom angle that is patently false…
ie: The inescapable flaw in incentives, as 35 years of research shows, is that they get you exactly what you pay for, but it never turns out to be what you want.
Not true - many times, properly designed programs get you EXACTLY what you want. To say they NEVER work is a falsehood.
Or:
“Incentives don’t just fail; they often backfire.”
Yeah, when designed by folks who don’t know how to design incentive programs. That’s like saying most surgery done by auto mechanics results in poor outcomes.
You do ask a great question - Do your plans work? Not enough people ask that question.
Paul, thanks for you input to this important question. As you well know, the compensation/incentive debate is front and center today. Even President Obama has appointed a Czar to head up this effort. Unfortunately, this will likely lead to more confusion than clarity on this issue. At the end of the day, I’m wondering if a lot of organizations (which are now being educated - so to speak) will ask, “Is it really worth all of the effort, and potential risks?”
It will be interesting to follow the dialogue as it unfolds.