In all areas of life, incentives work really well. They’re easy to understand—if I do this, I will get that—and they focus people on a specific outcome. We start young—eat your vegetables and you’ll get dessert—and we continue to respond to incentives all our lives.
In business, incentives are incredibly successful. Do you want your employee to do something really well? Make it a requirement in order to get a raise. Do you want your executives to accomplish something specific? Put it in their bonus plans.
And because incentives are so successful, you must create them carefully. It’s highly likely the thing you are trying to accomplish will be done to the letter, so make sure it’s exactly what you want.
If you have a shop and you want it to be clean when customers come in, it may be tempting to set a goal requiring employees to spend a certain portion of their shift cleaning. But if employees are so focused on keeping the store tidy, they neglect customers who need help, shoppers won’t be back. Your team achieved the goal you set, but that’s really not what you wanted.
Or let’s say you conclude a certain amount of turnover is a good sign managers are constantly improving their teams, as one large company has reportedly decided. So, you create an incentive for managers to achieve a specific turnover goal and reward them if they hit that number.
That’s not really what you meant to do.
You meant to ensure managers constantly optimize their teams, and it is possible that means moving poor performers out. But training, mentoring, and retaining team members may be even better. Of course, that’s not going to happen now, because managers are going to focus on firing enough people to hit their numbers. Or, as has been reported, intentionally hire people who are not qualified, then fire them to meet the quota. (Which is perversely clever: managers hit their turnover goals while protecting their good performers, but at a high cost to the poor pawns in that game.)
Possibly the most misguided incentives are those created by corporate boards for their CEOs and other executives. Like any incentive, executive bonuses are highly effective, and they don’t just guide the leadership team. Because for executives to achieve their goals, the entire company, top to bottom, must work toward them too. The executive bonus plan becomes a roadmap for everyone.
For decades, increasing short term shareholder value has been the primary goal for most CEOs. Their bonus depends on it, and that bonus usually includes stock, so the CEO is highly motivated to increase the share price.
But does the board really want the stock price to increase at any cost? Or does the board want leadership to live up to other values as well?
Where is the line?
In the quest to increase shareholder value, is it OK to break the law? Ruin the environment? Abuse employees? Endanger their health?
Is it OK to pay off detractors? Hide transgressions with non-disclosure agreements? Lie to congress?
Is it OK to keep wages so low the government must step in with food stamps and other assistance? Is it OK to dodge taxes so regular citizens are left to fund the public infrastructure that makes the business possible?
Perhaps boards don’t overtly encourage any of this behavior, but they tacitly endorse it when they reward one kind of result without setting conditions for achieving it.
Maybe directors don’t think it through and consider what an executive team might do to accomplish their goals. Or maybe they do, but the incentive plan is still heavily weighted toward valuation, with diversity or governance or social responsibility accounting for only a small percentage of the bonus.
Here’s a suggestion.
When you set incentive plan goals, make another list of the things you are not including in the plan, things like ethical treatment of employees, responsible environmental policies, or principled lobbying practices. Title that list, “Accomplishments for Which the Board of Directors Will Not Reward Company Executives,” then imagine circulating it to the media, employees and shareholders.
You may have policies regarding these things but realize that by excluding them from the incentive plan, you’re saying that they are not as important as stock price. Is that really what you mean to say? How would you feel if your customers, employees, and shareholders saw that list? How would you defend it?
Of course, no board member would say they don’t want good governance, respectful workplaces, fair wages, and socially responsible policies. But they send mixed messages when they pay lip service to those issues, but only reward financial performance.
Changes are coming. Some investors are starting to hold executives accountable for more than profits. Notably, those investors are called “activist investors,” not “responsible investors,” or “concerned investors,” but nonetheless, they are making themselves heard. Recently, shareholders have convinced Apple to include environmental, social, and governance goals in their executive bonus plan, and an investor secured two Exxon board seats by promoting a climate agenda, so change may come there too.
But it shouldn’t take activists to make boards think hard about the kind of companies they want to create and the role those companies play in society, then use executive incentives to get it done.
It will work. It will change behavior, priorities and even company culture. Because like all of us, corporate executives will eat as many vegetables as necessary to get their dessert.
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