Carrots, Sticks, and Unintended Consequences

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Carrots, Sticks, and Unintended Consequences

Having seen example after example of the “power of the carrot” I have long maintained that organizations large and small should be careful, very careful what they incentivize people to do, because it will absolutely, positively drive behavior… in every one of us. We’ve seen it on a super-sized scale in the healthcare fee-for-service model, where providers ring the register thru unnecessary and duplicative procedures, and now in banking (again!) even after the near meltdown of the global financial system in 2007-8.

In a story reported by CNN, Richard Cordray, director of the Consumer Financial Protection Bureau announced that Wells Fargo Bank employees had “secretly opened unauthorized accounts to hit sales targets and receive bonuses.”  According to the CNN piece, this was no minor caper, with over 1 million bogus bank and credit card accounts opened, and about 5300 Wells Fargo employees terminated for their role. 5300 people!

So, what if anything can the rest of us do to prevent or at least minimize such behavior in our own businesses? Several things come to mind, but the first is, don’t over-react and become averse to incentives in general, but do be very thoughtful about how you structure and implement them. A few thoughts:

1.    Realizing that you cannot prevent every conceivable scam (new mousetraps tend to yield smarter mice), take steps in advance to minimize their occurrence and the damage. Before implementing any incentive, make sure that you are indeed incentivizing the correct behavior, and that there are no unintended consequences.

2.    Project the level of anticipated usage and think thru the possible avenues of malfeasance. Discuss the incentive program, performance payout targets and fornulas in advance with your management team, internal auditors, and a sample of current workers who will be impacted by the incentive. This is also an ideal place to chat up some people who no longer work for your firm, but still have the organization’s best interest in mind. You do have such a network, right?

3.    Subsequent to launch, pay careful attention to both the levels and location of incentive payout to identify trends that might be induced by misbehavior.

4.    Pay particular attention to areas with weak leadership, where managers might be asleep, where employees could be more inclined to cheat as a way of relieving unreasonable performance pressure, or to get even with a bad boss.

5.    Be very careful how much you use the “stick”  (the un-carrot if you will) to influence the behavior of those who are not meeting targets, as they will always find a way to make the pain stop. As suggested by the Wells case, their methods of doing so may not always be in your best interest.

6.    There are very few secrets any more. If one or more people (never mind 5300) are somehow beating the system, be assured that others know about it. If you’re maintaining the kind of relationship with employees that you should be and are willing to listen, they will quietly let you know. Then, it becomes your duty to listen, act, and preserve the confidence.

7.    Finally, don’t be afraid to claw back bonuses and prosecute people for criminal behavior. It sends an unmistakable message. 

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