The Trouble with Incentives: They Work

Gipsie B. Ranney has a great new article – The Trouble with Incentives: They Work

I have wondered whether the escalation of pay, perks and parachutes for CEOs actually tends to attract individuals who are primarily extrinsically motivated, rather than individuals who are seriously interested in creating value. Several recent examples appear to be consistent with this view.

An important issue with regard to incentives is possible effects on teamwork and cooperation. If the incentive system is set up as a zero-sum game, then for me to win, you have to lose. This is a very effective way to ensure that there is little or no teamwork or cooperation. Interactions between individuals and groups are likely to become negative, to the detriment of the organization as a whole. When incentives are based on narrow functional objectives, achieving those objectives may guarantee that the system as a whole will be suboptimized.

the Mayo Clinic, “which is among the highest-quality, lowest-cost healthcare systems in the country.” He reports that “decades ago Mayo recognized that the first thing it needed to do was eliminate the financial barriers. It pooled all the money the doctors and the hospital system received and began paying everyone a salary, so that the doctors’ goal in patient care couldn’t be increasing their income. Mayo promoted leaders who focused first on what was best for patients, and then on how to make this financially possible.” He goes on to say, “the core tenet of the Mayo Clinic is ‘The needs of the patient come first’ – not the convenience of the doctors, not their revenues. The doctors and nurses, and even the janitors, sat in meetings almost weekly, working on ideas to make the service and the care better, not to get more money out of patients.”

Could it be that physicians, insurers, drug companies, and patients are simply acting rational to the system? The players are incentivized to behave as they do. The system delivers what it is designed to deliver.

She sums it up very well:

There may be cases in which incentives work only as intended, but I suspect they are relatively rare. The trouble is that we are usually dealing with complex systems (people and organizations) that may behave not at all like our myths would predict. The best policy may be to avoid incentives altogether and focus instead on creating systems in which intrinsic motivation, cooperation, ethical behavior, trust, creativity, and joy in work can flourish.

Find more articles on management improvement in the Curious Cat Management Improvement Library, including: An Interim Report on Motivation in the Workplace by Gipsie Ranney, Remembering NUMMI by Gipsie Ranney and Improving Problem Solving by Ian Bradbury and Gipsie Ranney.

When you can’t prevent arbitrary targets and rewards based on meeting them the strategy I attempt to put in place is figure out how the system will be distorted in order to meet those targets and then put in measures that will discourage such distortions. It isn’t perfect but can help prevent some of the worst distortions (and degradation of system-wide performance they cause).

Related: Righter IncentivizationThe Defect Black MarketDr. Deming on the problems with managing with targets (and incentives based on them)Extrinsic Incentives Kill Creativity