Cracking the Code: Aligned Incentives + Meaningful Consequences = Solid Results

“They want us to give great service, but they reduce our bonus if our calls go longer than three minutes. I’m not going to lie, I start talking faster at the 90-second mark.”

“She asked me to suggest ideas, so I did. I now have a whole bunch of extra work to do. It’s the last time I’m opening my mouth. I didn’t realize offering an idea meant signing up to execute it.”

“I get paid for selling products. Deep down, I know some of my customers don’t need what I’m recommending, but I do it anyway. Nothing has happened to me as far as consequences go, but how wrong can it be if nobody is complaining. I’m not proud, but I am getting decent checks. It’s a living.”

“We’re supposed to be polite, but most people aren’t. Nobody does anything about it. I guess that’s how business goes around here. I don’t know why I keep trying.”

Wow! Incentives and consequences have power. Are you motivating the right behavior, or are you encouraging people to act in ways you don’t want? Misguided incentives or misaligned consequences have a huge downside. The good news is with a careful thinking, you can avoid missteps.

The Downside of Misguided Incentives:

Short-Term Focus: In many cases, businesses with misguided incentives prioritize short-term gains over long-term sustainability. Employees who are only rewarded for immediate financial results or quick wins may overlook the importance of investing in innovation, customer satisfaction, and employee development. This narrow focus can limit the organization's ability to adapt to changing market conditions and remain competitive in the long run. Do you focus only on here and now, or do your incentives and consequences take the long-term into account?

Unethical Behavior: Misaligned incentives can lead to unethical behavior within an organization. Employees who are rewarded for meeting sales targets, for example, may resort to aggressive tactics, dishonesty, or cutting corners to meet those targets. This undermines trust, harms the company's reputation, and puts it at risk of legal and regulatory consequences. What kind of ethics do your incentives encourage?

Silo Mentality: Incentives designed without considering the broader impact on different departments or teams can foster a silo mentality. When employees are rewarded based on individual performance metrics, collaboration and knowledge-sharing may suffer. This lack of cooperation can stifle innovation, impede problem-solving, and limit overall organizational effectiveness. Do your incentives and consequences encourage hoarding and silos or do they promote information sharing and collaboration?

Demotivation and Disengagement: Incentives that are meaningless can demotivate employees and create a sense of disengagement. Employees may lose intrinsic motivation and become disillusioned if the rewards do not align with their values, interests, or aspirations. This can result in decreased productivity, higher turnover rates, and a general decline in morale. Do employees care about the rewards or consequences you have in place?

Tunnel Vision: Employees may develop tunnel vision when incentives are narrowly focused on a single metric or objective, ignoring other critical aspects of their roles. For example, if sales representatives are solely focused on meeting sales targets, they may overlook the value of developing long-term customer relationships or providing exceptional service. In the end, those choices will most likely lead to customer dissatisfaction and reputational harm.

Building Effective Incentive Structures

A strong system that is aligned with goals and values and regularly applied is the best offense and defense an organization play.

Align with Long-Term Goals: Think about what matters. For example, are you focused on customer retention and satisfaction? If that’s the case, incentives should support those results. Additionally, there should be consequences to address behaviors employees choose that negatively affect retention and satisfaction. For instance, if the employees are rushing interactions, at a minimum, they should not receive a reward. Ideally, managers should address the behavior.

Foster Ethical Standards: When people do the right thing, they should receive recognition. When the opposite occurs, management must act quickly to coach, and correct, or cut ties if the first two approaches don't align behavior. When unethical behavior is ignored, an aggressive cancer can develop. Left unchecked, what’s wrong can quickly become what’s normal. 

Balance Individual and Team Goals: Strike a balance between individual performance and team collaboration. When designing incentives, promote both individual achievements and collective success, encouraging employees to collaborate and share knowledge. Additionally, think about consequences. How will you handle those who hoard and don’t think about the group’s success?

Evaluate and Adapt: Continuously review and evaluate the effects of your choices. Solicit feedback from employees, monitor unintended consequences, and make necessary adjustments to ensure incentives remain relevant and aligned with evolving organizational goals.

Incentives and consequences are powerful tools that can shape employee behavior and drive business outcomes. When designed and implemented correctly, incentives can fuel productivity, innovation, customer service, and sales. Furthermore, carefully chosen consequences can mean the difference between the right choice and the wrong one.