We have a new incentive plan, what could possibly go wrong? (almost everything)

Fred WhittleseyCannabis Compensation Consultants, Conscious Compensation: The Impact Compensation Blog, Pay and Performance: The Compensation Blog

In this week’s edition of The Economist, the columnist Bagehot writes “How the British government rules by algorithm” (subscription required, and well worth it!). Compensation professionals: don’t leave this blog posting just yet.

I’ll cite three examples they reference that speak for themselves, all direct quotes from the concise one-page article.

“Targets create three common problems. They produce perverse results when people focus excessively on them. They tempt managers to manipulate numbers. The obsession with measurement diverts people from useful activity to filling in forms.”

“The department of health provided a fine example of the first when it penalised (sic: hey chap, it’s spelled with a “z”) hospitals whose emergency departments took too long to treat patients after ambulances had dropped them off. Hospitals responded by keeping patients waiting in ambulances rather than in emergency departments.”

“The Metropolitan Police… linked pay and promotion to achieving a crime-reduction target. A police whistle-blower told a parliamentary committee that downgrading or underreporting crime had become ‘an ingrained part of police culture’.”

“The universities to which a-level students are struggling to get admitted provide an example…Tenure and promotion are awarded on the basis of the production of articles (which can be measured) rather than teaching (which can’t), so students suffer.”

Have we ever:

Implemented incentives for call center reps measured on contacts per hour but when there is a difficult customer problem…they hang up?

Had safety incentives in extraction industries, or manufacturing…telling the employee, don’t report that injury or your bonus will be smaller?

Hinted to a bank loan officer, make lots of loans, big loans. Don’t worry about credit quality?

Suggested to an employee that they could maximize their incentive payment based on number of new customer accounts, just create some accounts, but don’t tell the customer? (Yes, I’m talking about you Wells Fargo)

Seen that we can’t meet our car sales goals due to our not meeting emission standards, and just alter the software? (Yes, I’m talking about you Volkswagen).

Seen salespeople withhold or accelerate orders for their monthly or quarterly incentive? Or restaurant managers who won’t fix a piece of equipment until the first day of next fiscal quarter? Sorry, we don’t have ice cream right now. How about cake?

Maybe I am biased toward articles in the The Economist because of their truly unbiased weekly insights on our world. Or maybe because of my British ancestry, documented in my family genealogy book going back to 900 AD.

Or maybe because I can read an article subtitled “The over-enthusiastic application of scientific management in the (British) public sector” and it so perfectly describes the broken incentive structures in US companies.

Or maybe because I have seen thousands of instances of this problem. And we keep designing incentive plans and they keep generating these stories.