Incentives

Incentives provide the motivation to leadership to perform the responsibilities in a context. They must motivate leaders to be accountable for successfully running the business capabilities (they are responsible for) and changing the business capabilities, to make them better, when needed.

Incentives should be structured as a combination (and balance) of extrinsic motivations like financial rewards and formal recognition, and intrinsic motivations like personal mastery, autonomy, and purpose. Incentives are most powerful when the extrinsic and intrinsic motivations support each other. And financial incentives have limits; as Dan Pink said, “The best use of money as a motivator is to pay people enough to take the issue of money off the table.”

When based on tangible results, incentives also seek to balance rewards based on individual targets, cross-team targets (to encourage collaboration), and broader (i.e. company) targets.

Incentives for change are especially important, and quite difficult to get right in complex systems.   They must emphasize change against the most strategic needs, while navigating the paradox of accountability without blame. Rewards should happen close to when the behaviors of change happen, to reinforce these desired behaviors.

Charlie Munger is one of the most vocal advocates for incentives, saying that the most important rule in business is “to get the incentives right”. He adds, “Dread, and avoid as much you can, rewarding people for what can be easily faked.”

Incentives tied to goals can sometimes create motivations for cheating. There will be tension between setting goals that are so low that performance doesn’t improve, and higher goals that increase the percentage of cheating. Emphasizing intrinsic motivations can help with this, too. Pink says, “When the reward is the activity itself – deepening learning, delighting customers, doing one’s best – there are no shortcuts. The only route to the destination is the high road. In some sense, it’s impossible to act unethically because the person who’s disadvantaged isn’t a competitor but yourself.”

In general, simpler, timely, universal incentive systems work better: they are easier to understand, activate when the desired behaviors happen, are perceived as more fair, and are less likely to be “gamed”.

Example Syntax:

"<This recognition> with <this financial award> will be given <at this timely cadence> to leaders who can demonstrate that they have applied <their personal mastery, autonomy, and purpose> to help achieve <these company goals>"

For more:

• "Drive: The Surprising Truth About What Motivates Us", Daniel Pink.
• "The Psychology of Human Misjudgment", Charlie Munger.