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why corporate incentives fail us: the shocking truth


chasing incentives


In 1985 "New Coke" was launched by the Coca Cola company. It promised a reformulated drink that would appeal to the Pepsi generation and thus increase market share and profits. Unfortunately, it didn't. It did the exact opposite. Existing consumers were outraged, boycotts were commonplace, and the media frenzy that followed amplified marketing confusion. Within 79 days of the launch of New Coke, Coca-Cola reintroduced the original formula, branded as Coca-Cola Classic.


Let’s be real: corporate incentives are a bit like that. Not only do they rarely work as intended. They often do the exact opposite. Sadly, the 'incentives formula' was invented long before1985. It has been around for years destroying shareholder value. Research has shown that incentive plans often fail completely, as highlighted by Alfie Kohn in his seminal Harvard Business Review article, "Why Incentive Plans Cannot Work" (1993).


If I had a dollar for every time one of my clients told me that their incentive scheme is there to encourage sales of this, profits of that, or simply to retain their ‘top talent’…..

If I had two dollars for every time someone told me that the incentive scheme didn’t produce what was expected – or rather – produced outcomes that were not desired or planned for at all…. then I wouldn’t be writing this at all. I would be on my sailboat in the Canaries.


Perhaps then a key question is ‘what is the purpose of an incentive scheme at all?' I will come back to that. For now, let’s dive into why traditional corporate incentives are about as useful as a screen door on a submarine and what we can do, if anything, to make them work better.


Grab some popcorn, folks, because this is going to be a fun ride!


Pitfalls of Corporate Incentives


1. Misalignment with Long-Term Goals: The Short-Sighted Seagull Approach


Picture this: you're at the beach, trying to enjoy your picnic, and here comes a seagull, eyeing your sandwich. That seagull is the incentivised sales team, laser-focused on your ham and cheese (quarterly sales targets). Sure, the seagull gets the sandwich, but now you’re left hungry, and the seagull is off pooping on someone else's picnic. Research shows that an excessive focus on short-term goals can indeed compromise long-term outcomes and organizational health (2).


short term goals

Take Siemens, for instance. They were so focused on hitting sales targets that they ended up embroiled in one of the biggest bribery scandals in corporate history. Their incentive programs led to a culture where the end justified the means, and the means often involved suitcases full of cash (3).





2. Encouraging Unethical Behaviour: The Shady Used-Car Salesman Syndrome


Ever met a used-car salesman who insists that the 1998 rust bucket is a “classic” and a “steal at this price”? That’s what happens when employees are driven by misguided incentives. They'll say anything to close the deal, even if it means selling your grandma’s dentures as a Bluetooth earpiece.


shady sales

The Wells Fargo scandal, where employees opened fake accounts faster than you can say “fraud,” is a case in point (4). We shouldn’t be surprised to learn that performance-based incentives can lead to unethical behaviour as employees can and do bend the rules to achieve targets (5).



General Electric (GE) faced similar issues when their aggressive incentive structures led to dubious accounting practices. GE was so busy trying to make their quarterly earnings shine that they ended up in hot water with the SEC for misleading investors (6). Before you think that is the benefit of hindsight, I was there before all that came to light. I can confirm that nobody was under any illusion that the culture would lead to such an outcome. Nobody was surprised, except perhaps the GE Board. If only they had asked?


On a personal level when working for a UK Bank , I was incentivized to sell insurance alongside a loan to a company that was on shaky financial grounds. The problem? If I agreed the loan, then my equipment insurance sale would land a hefty pay cheque into my bank account. But I also knew, the company was not good for the loan. Ethically it was more than murky—it felt like setting up dominoes knowing full well they would topple. I asked my manager what to do. ‘Your choice’ was his reply. What he meant, clearly, was you make the loan because I will earn on your insurance bonus too! So, I turned down the loan application and deliberately forfeited my incentive. Sure, my wallet felt lighter, but my conscience remained intact. The company took out a loan elsewhere….and went into receivership 3 months later. My employer was saved a loss, even if it cost me my incentive commission.This experience taught me the true cost of misaligned incentives—not every dollar earned is worth the compromise of one’s own values.


3. Demotivation and Job Dissatisfaction: The Office Space Conundrum


Remember the movie ‘Office Space’? It’s a perfect example of how incentives can backfire. Imagine getting up every day, knowing that your boss is going to ask about those TPS reports, again. When your job becomes all about hitting arbitrary numbers, you might start feeling like Peter Gibbons, waiting for the day you can smash a printer with a baseball bat. Research in behavioural economics has shown that excessive reliance on extrinsic rewards can undermine intrinsic motivation and lead to job dissatisfaction (7).


Barclays Bank experienced a similar backlash when their aggressive bonus culture led to widespread dissatisfaction and a toxic work environment. Employees were more focused on meeting their targets than on the actual quality of their work, leading to high turnover and low morale (8).


Another glaring example is AIG during the 2008 financial crisis. Despite the company’s role in the economic collapse and its need for a $182 billion bailout, AIG executives received $165 million in bonuses. Employees became demoralised employees, public outrage sparked and trust in the company was eroded (9). Well. Who would have thought eh?


4. Fostering Internal Competition: The Hunger Games Workplace


Welcome to the office, where it’s every man, woman, and photocopier for themselves! Incentives that reward individual performance turn your workplace into a real-life Hunger Games. Instead of collaborating, your colleagues are hiding their best ideas like squirrels hoarding nuts for winter. Sure, it’s entertaining, but it’s not exactly productive. Psychological studies indicate that while some competition can be healthy, too much can harm collaboration and overall productivity (10).


And don’t think for one moment that this is the game played by your junior employees, all vying for a share of the very limited financial incentive pot. It exists with your board members too. Some years ago I was dragged along by my divisional CEO to support him in front of the global board of a major publicly listed company valued at well over €100 billion. I was to say the least, both nervous and excited. I genuinely looked forward to meeting people I had only every heard of or seen on a glossy shareholder prospectus. What I didn’t expect was the utter madness of a circus act. A circus act that felt as though it was held in a tent with no heating on a cold midwinter frosty night. Which was apt since it was a snowy frosty mid-winter at the time.


cold board room

In a boardroom as frigid as the Arctic, the directors, without exception all grey old men, assembled to dismantle our investment proposal with the precision of an engineering team - which is exactly what they were of course. Lifelong engineers who had climbed the greasy corporate ladder and found themselves centimetres away from the egotistical orgasm of becoming the head of the greatest global engineering conglomerates in the world.


We walked into the Board room. They were silent. Unwelcoming. I looked at them.  Their eyes gleaming with the cold ambition of bonus-hungry wolves. One director, with a face like a frozen glacier, flatly stated that my idea was "unrealistisch," implying that even considering it would be a colossal waste of their valuable time—a ploy to ensure he remained the star in the eyes of the CEO. At least that, I suspected, was his calculation. Another, his expression as cold and rigid as a Berlin winter, quietly but firmly declared my proposal as "nicht machbar," while proceeding to extract just enough information that looked suspiciously as though he intended to somehow repurpose some of my basic concepts to inflate his own bonus while sabotaging that of his colleagues.


Then there was the CEO, an Austrian with a perpetual look of mild confusion, who stumbled over his words, trying to dismiss my innovation as "überflüssig" but ended up saying "überfliessig," earning a few hidden smirks from the directors. As he continued to mumble something about strategy, clearly not grasping the finer points, he also wanted to know more, as if mentally noting to steal the idea later anyway, though how he planned to execute it was anyone’s guess. I suspect he was just confused.


It was a scene of frosty sabotage and shameless self-interest, where each director was more focused on their secretive plots and personal bonuses than on the collective good. The boardroom felt more like a battlefield of ice-cold egos and cutthroat ambition, each director eager to outdo the others at any cost, even if it meant torching the potential of my proposal.

And before you think that’s just not happening on your watch. Think again my friend. Think again.

 

Making Incentives Work (Without the Shenanigans)


Given these laughable pitfalls, it’s clear we need a new approach. Here’s how to make incentives more effective:


1. Align Incentives with Core Values and Mission: The Zen Approach


Zen

Instead of dangling shiny objects in front of your employees like they’re cats chasing laser pointers, align incentives with the company’s mission. Think long-term: customer satisfaction, innovation, and making the world a better place. It’s like yoga for your business – calming and way less likely to result in claw marks.


2. Promote Intrinsic Motivation: The Feel-Good Factor


Imagine a world where people come to work because they love what they do. Crazy, right? Give employees meaningful projects, chances to grow, and some good ol’ fashioned recognition. It’s like finding out your favourite pizza place delivers for free – everyone’s happier, and no one’s fighting over the last slice. Studies by Deci and Ryan on Self-Determination Theory emphasize that intrinsic motivation is key for employee satisfaction and productivity (11).


At Semco, “corporate democracy” involves rotating job roles and allowing employees to choose their own work hours. This flexibility and sense of ownership has consistently boosted intrinsic motivation, as employees feel more connected to their work and valued for their contributions (12).


3. Encourage Collaboration and Team Success: The Avengers Approach


Why be Iron Man when you can be the Avengers? Team-based incentives encourage collaboration and make everyone feel like a superhero. Your office transforms from a cutthroat battlefield to a harmonious ensemble cast where everyone’s powers complement each other. No capes required. Research supports that team-based incentives can enhance collaboration and improve overall performance (13). Afterall, do you really think that your star performer did everything on his/her own? I don’t think so. Even the lone ranger wouldn’t have been much good without Tonto and his horse, Silver. If all the rewards go to The Lone Ranger, how long before Tonto finds a new partner to support. And Silver disappears for pastures new.


Beware the person who abuses loyalty.


4. Implement Fair and Transparent Metrics: The Crystal Ball Approach


Use fair, transparent metrics that don’t require a Ph.D. in rocket science to understand. Measure a range of factors and adjust them regularly. It’s like reading the future in a crystal ball but more accurate (and less likely to involve Tarot cards). Transparency in performance metrics has been shown to increase trust and clarity among employees, leading to better engagement (14).


fair and transparent crystal ball

Of course, companies do know that so, with the aid of Human resource departments, have produced all sorts of clever ways of including team-based metrics that attempt to avoid arbitrary and unfair allocation of performance awards. With the result that they so often produce arbitrary and unfair awards. The problem isn’t the intention. The problem is that humans get in the way. And if humans don’t get in the way the the issue remains that they invented the metrics in the first place. Metrics that patiently and by definition cannot capture the essence of real added value performance.


In one organisation I worked for we used to have the annual Round Table exercise. It was meant to be an annual meeting in a collaborative discussion format where stakeholders, team members, and experts come together to review, analyse, and discuss performance data. Wonderful. It became my most dreaded meeting of the year. A cast of thousands would be invited to discuss everyone in the company (bottom down I hasten to add, never bottom up) What was meant to be an objective discussion around performance data ended up within five minutes, a total bun fight, each manager presenting his or her departmental employees generally in the best possible light often against a backdrop of the most awful financial results known to mankind.


round table meeting

In my first ever meeting, armed with reams of performance metrics, I quickly discovered my preparation was superfluous. One of my colleagues, Johannes, patiently listened to my reasoned data driven arguments and when I had finished said to all of what seemd to be an army of managers and myself ….’I find this employee to be rather rude.’ ‘How so?’ I asked. ‘She is abrupt’. ‘In what way?’ Johannes launched into a tirade about Sarah's supposed rudeness, citing an incident where she allegedly gave him a withering look when he asked her to pass the stapler. His evidence was dubious at best, hinging on the assumption that Sarah's facial expression could only mean disdain, completely disregarding the possibility that she might have simply been concentrating on her work. He rambled on, referencing Sarah's choice of coffee as a clear indicator of her hostility, suggesting that anyone who drinks black coffee must harbour a dark, bitter soul. When questioned further, Johannes only doubled down, pointing to Sarah's efficient email responses as "curt" and "too professional," a clear sign, in his view, of her inherent impoliteness. The entire discourse was peppered with his subjective interpretations and wild leaps in logic, painting a picture of Sarah that seemed more like a caricature than reality. Needless to say, she had her performance rating drastically cut down. I refrained from informing her that she should drink white coffee in future. But Johannes was right about one thing. I discovered later that he too drank dark coffee.


These occurrences became the norm, much to the frustration of my HR manager. My boss at the time decided it was all too much so with a few taps of a keyboard he pronounced that in future we would adhere rigidly to detailed performance metrics, no discussion allowed. ‘Totally objective’. You can probably guess what happened at the following Round Table. Everyone came armed with reams of data all proving without a shadow of doubt that their employees had outperformed their metrics and were all stars deserving of big bonuses. Data manipulation and presentation became an industry, absorbing thousands of organisational man hours into proving statistical over-performance. Strangely the summation of all individual performances didn’t add up to reflect the overall performance of the organisation. Not by a long shot. Funny that. Within one year we had reverted to the good old tried and tested fact-less talking shop. ‘Good eggs’ were well rewarded. ‘Bad eggs’ left behind like a bad smell.


5. Emphasize Ethical Behaviour and Integrity: The Golden Rule


behaviour and integrity

Reward employees not just for what they achieve, but how they achieve it. It’s like teaching your kids to share their toys – everyone gets to play, and no one ends up with a Barbie shoe up their nose. Plus, it builds a culture of trust and honesty. Win-win! Studies suggest that recognising and rewarding ethical behaviour can significantly enhance organizational culture and employee morale (15).



Conclusion


The simple truth is that incentives address the wrong emotions. Sure, give people a bonus for selling more ice cream and, likely as not, they might just sell more ice cream. Or they might not. You see, by and large, people don’t work harder or less hard with a bonus dangling over their heads. At least not consistently. I have yet to meet a single person who worked harder with a bonus contract in their filing cabinet than one that didn’t. Certainly, I never worked harder because of a piece of paper promising x if I did y. Indeed I, like many others, would have found it deeply insulting. I took the bonus of course. I’m not totally daft. But I was proud to achieve things that were good for the company and happy if I was rewarded for it. It wasn’t the other way around.


Does that mean I would have happily given up my bonus so that I could work hard without the encumbrance of worrying about an end of year pay packet hike? Of course not! But that’s a whole different issue. If your purpose of an incentive scheme is employee retention, then…well…. pay them what you think they are worth. If the employee thinks they are worth more then they will leave (all other things being equal). And if they need incentivising to work, are they really the employees you want to retain anyway?


Albert Enstein quote on success

Traditional corporate incentives might look good on paper, but in practice, they often flop harder than a soufflé during an earthquake. By focusing on long-term goals, fostering intrinsic motivation, promoting teamwork, using fair metrics, and emphasizing ethics, companies can create incentives that work, at least to some extent. So let’s ditch the seagull tactics and shady sales pitches and build workplaces where everyone’s working towards the same awesome goal – without the drama.


“The best way to align incentives with company goals is to ensure they reflect not just the outcomes we seek, but the values we uphold.” Andy Swadlo, Corporate Conference April  2018


Now, who’s ready to smash some printers?


© 2024 Andreas Swadlo

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If you’re looking for expert advice on creating effective incentive structures that truly motivate employees and drive long-term success, look no further. With years of experience in senior international leadership roles, I can help businesses design and implement innovative incentive programs that align with your core business values and goals. Let’s work together to create a workplace where everyone thrives. Contact me today to get started on transforming your corporate incentive strategies.


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References:


1. Kohn, A. (1993). Why Incentive Plans Cannot Work. Harvard Business Review. Retrieved from [Harvard Business Review](https://hbr.org/1993/09/why-incentive-plans-cannot-work).

2. Brickley, J. A., & Zimmerman, J. L. (2010). Short-term incentives and long-term performance. Journal of Business, 67(4), 564-592.

3. Eichenwald, K. (2008). The Bribery Aisle: How Wal-Mart Used Payoffs to Get Its Way in Mexico. The New York Times.

4. Egan, M. (2016). Wells Fargo fined $185 million for fake accounts; 5,300 were fired. CNN Money.

5. Schweitzer, M. E., Ordóñez, L., & Douma, B. (2004). Goal setting as a motivator of unethical behavior. Academy of Management Journal, 47(3), 422-432.

6. Tayan, B. (2018).

The Wells Fargo Cross-Selling Scandal. Stanford Closer Look Series.

7. Deci, E. L., Koestner, R., & Ryan, R. M. (1999). A meta-analytic review of experiments examining the effects of extrinsic rewards on intrinsic motivation. Psychological Bulletin, 125(6), 627-668.

8. Story, L., & Dash, E. (2008). Barclays Settles With New York in Inquiry on Mutual Funds. The New York Times.

9. Sorkin, A. R. (2009). AIG Planning $100 Million in Bonuses After Huge Bailout. The New York Times.

10. Beersma, B., & De Dreu, C. K. (2005). Conflict’s consequences: Effects of social motives on post negotiation creative and convergent group functioning and performance. Journal of Personality and Social Psychology, 89(3), 358-374.

11. Ryan, R. M., & Deci, E. L. (2000). Self-determination theory and the facilitation of intrinsic motivation, social development, and well-being. American Psychologist, 55(1), 68-78.

12. Semler, R. (2004). The Seven-Day Weekend: Changing the Way Work Works. Portfolio.

13. Kozlowski, S. W., & Bell, B. S. (2003). Work groups and teams in organizations. Handbook of Psychology, 12(3), 333-375.

14. O'Neill, T. A., McLarnon, M. J., Hoffart, G. C., Woodley, H. J., & Allen, N. J. (2018). The impact of transparency on trust in leader decision-making. Leadership & Organization Development Journal, 39(2), 318-337.

15. Treviño, L. K., Weaver, G. R., & Reynolds, S. J. (2006). Behavioral ethics in organizations: A review. Journal of Management, 32(6), 951-990.

 

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