I am in the final year of my Master’s in Engineering Management and well into my thesis, which focuses on the performance management of remote-working engineers. Throughout my research journey, one aspect that hasn’t emerged as prominently as I expected is incentives—particularly the challenges related to incentivizing the wrong outcomes.
People behave according to how they are incentivised — that’s the bottom line. Individuals will naturally gravitate toward actions that maximise personal gain in the shortest possible time. They will also focus on appearing competent and successful to improve their chances of promotion. As a result, aligning with a manager’s expectations often becomes the priority — even when those expectations may ultimately be misaligned with the organization’s long-term objectives.
Incentivizing is such a tricky balancing act. I can only think of one simple incentive scheme, sell the end of life item. E.g. If you work in a restaurant and one of the dishes is about to go off, give the waiters an extra commission for punting that dish! Other than that, every aspect needs to be carefully considered, including the long term impact of the incentive.
Some real life examples, the sales quandary
I have seen so many incentives backfire, and the sad part is that even when they are pointed out, managers don’t want to change the incentives because ‘we need to stick it through, it will work’. Now we must also understand that the plan needs some time to settle, and changing every few weeks won’t help, but if it looks like a donkey, sounds like a donkey, well then it’s probably a donkey!
One of my favorite blunders is putting a cap on sales personnel’s commission. Especially the sales people with a strong pipeline will simply hold back, sandbag it for the next month. The only time a company wants to hold back on orders is if they have a stock issue, or don’t have the capacity to roll out. But, I have to say, in all my years I have never seen a commission cap for a valid reason most of the time been put in place by misguided finance departments that think ‘sales people earn too much’. If your top sales person earns more than your CEO, the company is not in any trouble of missing targets! On the other hand, how many times have top performers left because of a commission change that limits their earning potential and the company sales just plummet!
In other cases, sales people are told to sell at all costs, no matter what is in the interest of the client. The problem with that is the number of businesses a company can sell to is finite. If your client feels ripped off, you will never sell to them again. Well, the organization won’t. The organization’s number of clients are finite, but the sales person that leaves a year later sells again because that number of finite businesses is still a large number to an individual sales person, they will find someone else to sell to in the same industry. So some of them simply sell, burn the bridges, get the commission and move on leaving the organization to trudge through the ashes trying to fix things with the client at a later stage.
But beware of the top talent that want to protect their turf. An all too familiar issue in sales organizations is where some salespeople have simply been around long enough to inherit lucrative clients when another sales person leaves. It takes a while for the position to be filled, and those clients need to be farmed as much as possible. The rational thing to do is to allocate a new sales person to the client right? Well, by the time the new hire is found, on-boarded and ready to take on the client, the inheriting sales person has either sold so much there is nothing left, or simply built such a relationship they can’t let go. The new sales person basically sits with no base of customers, needs to grow it from scratch, sometimes with long sales lead times, and somehow earn commission. In the end they also leave and the cycle just continues with the handful of the old guard holding onto all the clients. They also have no need to bring in new business so the company simply cannot grow new business and fails to recognize that a new business incentive is key to growth!
Incorrect contact incentives for subcontractors
In some cases companies enter into agreements that incentivize the wrong actions with subcontractors. One of the largest cities in South Africa had a very problematic CCTV network. Maintenance on cameras, networking, storage, physical infrastructure etc., most of it was outsourced. However, the company was paid per call out to repair equipment. What incentive do they have to keep the cameras working? There is no need for preventative maintenance, because they don’t get paid for camera uptime. The more faults there are the more money they make. One can also imagine what steps they can take to increase their number of call outs if the month was a bit short…. not to say that anyone would do something like that. This is a simple example where a total network uptime would be a better incentive than per callout. It would be in their interest to ensure every camera is working so well that they almost never have to go to that location thereby cutting maintenance costs.
Other issues with the wrong carrot
Some organizations have too complex a KPI incentive system. They have various steps in the sales pipeline from planning, prospecting, qualifying, and at the end to grow and farm the client. They need to have a certain pipeline etc. and if that list of tasks is allocated a percentage of the KIP, each task has a weight of 5-10%, so none of them are important. Well, you have to have a strong pipeline with backup deals to make your target, so let’s give that KPI a 50%. If that pipeline is a lot of noise and a wish list rather than a list of deals they can close, then what’s the point. At the end of the day, a recognizable sale is the only thing that counts. But if that is the only incentive how do you keep people in line in terms of ethics, selling with purpose, putting the customer first? Also, do you think that your top sales person will even bother coming to the office or sending their reports as long as they hit target? So putting a KPI and incentive on sales is extremely tricky.
This does not only apply to the troops, this goes all the way to the top! What about the new CEO that takes over a company? How many times have we seen those incentives be totally skewed? It seems to be very prevalent in companies that are doing well also. The CEO comes into power and discusses an elaborate change strategy, sometimes it’s not needed but they need to put their stamp on it. The incentive is set to company growth and deals are signed or tenders are won left, right and center. Whether they should be signed, align to the company strategy or can be executed is not important, but the order book grows and the company seems to be doing amazingly well, especially if the projects are multi-year projects. Within three to five years the CEO’s actions catch up to the company and shareholders and employees are stuck with the mess while the CEO gets a golden handshake.
The Wells Fargo Example
Another high-profile example of the dangers of incentivizing the wrong KPIs is the Wells Fargo account fraud scandal. In an effort to meet aggressive sales targets, employees were rewarded based on the number of customer accounts opened. This led thousands of employees to open millions of unauthorised accounts without customer consent, in order to meet unrealistic performance goals. The bank faced significant legal and financial penalties, as well as lasting reputational damage. This case illustrates how poorly designed incentive structures and misplaced KPIs can create systemic ethical failures and institutional risk, particularly when leadership fails to intervene early..
How to not give the donkey food poisoning
One of the easiest ways to resolve incentive issues is to involve the people being incentivized from the start. Too often incentives are driven from the top down and miss the point completely. Your top performers will tell you what they want as an incentive as well as what customers want in order for them to hit the targets. Additionally, don’t forget to talk to your bottom performers. If their KPIs are more admin related and not supporting the actual goal, they will never perform.
Here is a list of ways to get the incentives right. It sound simple but it really isn’t.
- Align Incentives with Organizational Strategy
- Use a Balanced Scorecard Approach
- Implement Leading and Lagging Indicators
- Regularly Review and Calibrate KPIs
- Encourage Ethical Behavior and Transparency
- Avoid Over-Reliance on Monetary Rewards
- Design for Team-Based Incentives Where Appropriate
- Establish Strong Governance and Oversight
Image credits, Bing Image Creator, Photo by Austin Lowman and Jürgen Scheeff on Unsplash
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