Legend has it that during British colonial rule in India, officials became concerned about the proliferation of cobras in Delhi. Interested in eradicating these dangerous animals, they offered a bounty for cobra skins.
But cobras are challenging to capture, and enterprising citizens quickly realized that rather than risk life and limb to catch cobras, they could simply breed them and turn in the skins for bounty. Cobra farms popped up, and the British government spent large sums on bounties.
When British officials investigated why they had a sudden uptick in cobra skins, they shut down the incentive program. Cobra farmers no longer needed their supply, so they simply released all of their cobras, which only exacerbated the original problem.
Whether the story is factual or merely based on anecdotal evidence, it gave rise to the term “cobra effect,” a term used to describe unintended consequences that result from misaligned incentives. Economist Charles Goodhart puts it more succinctly: “When a measure becomes a target, it ceases to be a good measure.”
Organizations of all stripes can still fall into the trap of misaligned incentives. When a large number of employees are engaged in tasks or projects that don’t drive company goals, companies are set up for failure. In a volatile business environment, aligning every part of your organization toward an overall strategy is more critical than ever.
Here are three ways to ensure your incentives align with strategic goals.
Start with Strategy
Too many companies make the mistake of starting with people and creating an organization around them. The tech giant Google found initial success because its founders stumbled upon the right innovation at the right time. This led them to believe that their company would thrive if they created an environment encouraging employees to stumble around in search of new products and solutions that would produce similar results, so they incentivized launching products.
The problem was that Google engineers learned that the number of launched products was the metric used by executives to promote people (note: link includes profanity). The engineers realized they could produce and launch products quickly and then abandon them, thus meeting the metric without adding real innovation or value to the organization. Some engineers even launched the same product more than once, corrupting the incentive to reach the level they wanted to achieve in the company.
Great companies are often built around initial accidental success, but hoping for more accidental success isn’t an effective long-term strategy. However the initial success came about; successful organizations eventually create a clear strategy and align everything else under that strategy.
To understand organizational strategy, ask questions such as:
- Where are we trying to go?
- Where’s the value-add?
- How are we going to improve our customers’ lives?
Know What Behavior You’re Rewarding
In 2016, the Consumer Financial Protection Bureau fined Wells Fargo $185 million for a “cross-selling scandal” in which bank employees opened millions of fraudulent accounts under customers’ names without their knowledge. Bank management suggested that employees were at fault. “There was no incentive to do bad things,” said CEO John Stumpf.
However, employees painted a different picture of high sales quotas and pressure to achieve sales targets by selling multiple products to existing customers. Some reported meeting with bank managers numerous times per day to check on numbers; others feared losing their jobs if quotas weren’t met. If customers didn’t need or want the products offered, some employees even went as far as to open fraudulent accounts and set PINs to “0000” so employees could control access to the accounts.
Selling additional products to existing customers isn’t unethical or illegal, and in theory, there’s nothing wrong with incentivizing sales of products. However, leaders must ensure they reward the right behaviors and not incentivize the wrong ones.
Wells Fargo’s strategy likely included growing through an increasing number of accounts, but it didn’t include heavy fines or ongoing lawsuits. As bank leaders continued to reward employees for fraudulent activity, they created misaligned incentives that damaged the brand.
Leaders need to be clear about what behavior they’re rewarding. When strategic goals are clear, everything else in the organization can be assessed through the lens of how it contributes to strategy.
Tie Success to Outcomes, not Outputs.
The idea of productivity tracking is not new, but with the rise of remote work and online school, technologies have arrived to track everything from driving habits to eye movements. Even grocery cashiers and hospice workers have been subject to productivity tracking. When employees are focused on keystrokes and logged time online, they can’t always focus on work that contributes to the overall strategy.
Employers who track productivity in these ways can sometimes erode trust and damage employee experience. But perhaps more importantly, this productivity focus doesn’t look at what really matters—the outcome. Unless your strategy depends on employees buzzing about creating the appearance that they are busy, emphasizing productivity can backfire. Instead, identify the metrics that actually correlate with success in achieving your strategic goals. If a stellar customer experience is part of an overall organizational strategy, leaders can reward employees who provide that experience rather than incentivizing productivity that doesn’t impact the customer experience.
As John W. Gardner said, “Every organization is perfectly designed to get the results it gets.” Leaders must ask, “What results are we getting?” and “What results do we want?” Organizations can align incentives with strategy and achieve their goals by starting with strategy, rewarding the right behaviors, and tying success to outcomes.
The experts at Stewart Leadership can help analyze and improve organizational structure and alignment. Contact us to learn more.
SELF CHECK:
- Do we have a clear organizational strategy? Does everyone know it?
- What is one way we can better align incentives under strategy?
- Do we encourage a culture of performative productivity? How?
