As Leaders, Why Do We Continue to Reward A, While Hoping for B?
Companies often encourage the bad behavior that executives publicly rebuke—usually in pursuit of short-term performance. What keeps leaders from truly aligning incentives and goals? asks James Heskett.
Often the incentives we put in place to stimulate and reward performance produce unexpected behaviors. Causes vary from one individual to another, depending on what each of us values and what we are willing to do for the organization and the incentive. Misfires also occur because of policies that conflict with incentives or the ways the incentives are administered.
In 1975, Steve Kerr, who would later become head of executive development at General Electric and head of its famous educational campus in Crotonville, New York, addressed the issue in a classic paper titled “On the Folly of Rewarding A, While Hoping for B.” The paper cites examples in many walks of life in which we reward behaviors that we hope to discourage.
“THE COMPLAINT ABOUT LACK OF INTEREST IN GOOD TEACHING CONTINUES AMONG STUDENTS, ADMINISTRATORS, AND THOSE FOOTING THE BILLS FOR THE EDUCATIONAL SYSTEM.”
For example, in politics, citizens support ideas associated with what academics call “high-acceptance, low-quality goals,” as in: “All citizens are entitled to health care.” Acceptance begins dropping, however, as the ways of achieving universal health care are proposed at the so-called “operative level.” So, politicians are rewarded for campaigning on low-quality goals and avoiding the details. Then, as citizens, we complain about the quality of elected officials when the issues later get down to the operative level.
Universities are experts at fostering the problem. The universal desire of students and administrators alike is for good teaching. What’s rewarded? Faculty research and publication. What provides greater mobility to faculty? Research and publication. So the complaint about lack of interest in good teaching continues among students, administrators, and those footing the bills for the educational system.
At other times, we are mindful of how incentives can go wrong, but we are unwilling to do anything about it. For example, we speak of the desirability of good long-term business performance, but almost all incentives—especially those imposed by markets—reward short-term performance while ignoring long-term performance.
“WE HOPE FOR COLLABORATION AND TEAMWORK FOR THE BENEFIT OF THE ORGANIZATION BUT PROVIDE INCENTIVES FOR INDIVIDUAL PERFORMANCE. ”
As leaders, we make these mistakes all the time. Here’s a simple one. We hope for collaboration and teamwork for the benefit of the organization but provide incentives for individual performance. Or we hope that employees will exhibit individual initiative in solving problems and dealing with unplanned situations, but we don’t recognize or reward them for it. Or we create incentives with the hope that they will influence performance. But the incentives are so small that employees ignore them.
Forty-eight years after Kerr’s paper, you might think that leaders and managers would be getting better at shaping and administering incentives. And yet behavioral economist Uri Gneezy, in his recent book, Mixed Signals, presents research findings that remind us again about failures to understand the complexities surrounding incentives and ways of avoiding or minimizing their unintended consequences.
Most business leaders would probably agree with Kerr and Gneezy. But too many examples, such as the frequently cited Wells Fargo fiasco in which employees were incentivized to cheat (and alienate customers) in an effort to expand and deepen customer relationships, continue to plague business today.