Surface Ripples

Ineffective Incentives

 I’ve  just read an article on the state of the U.K.’s National Health Service (NHS), the problems it faces and how they might be fixed.

One of the major problems identified is that the wrong activities incentivised. This means that the NHS gets paid for treatments and activity rather than results.  Focus is on crisis management, not care and prevention. 

It made me think: most organisations have some kind of “incentive scheme”. The idea behind these is that employees will be rewarded for displaying the correct behaviour or being successful in certain activities.

The problem is it becomes too easy to “game the system”. As has become apparent in the NHS, to keep or increase budgets, hospitals are performing unnecessary treatments towards the end of life for some patients and their conditions.

Similarly, one of the root causes of the global financial meltdown that commenced in 2007 was the way that traders in Collateralised Debt Obligations were rewarded for their sales. In short, the system there was driven by greed.

Another example can be found in the complaints and court cases about UK lenders selling “Payment Protection Insurance” (PPI) to customers who took out mortgages with them.  The idea of PPI was that, if the customer lost their job or was otherwise unable to make their mortgage payments, the insurance would cover the debt. However, it appeared that this insurance was not being sold in an “ethical” manner, was being sold to those for whom it was not suitable or was being sold without even the knowledge of the customer that it was being sold to them. Result: banks found culpable were ordered to reimburse customers millions of pounds.

The reason behind performance management and incentives is to ensure a business‘ continuing success as well as the development of future leaders. That’s natural and understandable. However, incentive schemes need reward the right outcomes, and  not simply those who find ways to beat the system.

My own experience showed me clearly that often, people spend more time in “fudging figures” than in meaningful activity that results in the outcomes desired for the company.  This is only natural! Human beings are psychologically predisposed to expend minimum effort for maximum reward. If there is a way “around the system” they will find it.

This means that it’s often impossible to design a fool proof or tamperproof incentive scheme. The only way to minimise this kind of tampering is to police regularly the way people are being assessed or to change incentivisation frequently enough that it becomes unproductive to find novel ways of gaming the system rather than turning in the performance levels required.

The other major problem with incentive schemes relying on inputs is that people indulge in what we know as “box ticking exercises”. One of my clients told me about a situation where employees were required to submit a certain number of a certain type of report every year. The result was that they found any excuse to submit such reports whether they were about genuine or fanciful issues. Not only that, but they were “recycling” reports submitted two or three years before for the current year to ensure that their numbers remained constant.  In the intervening period, it was likely that either the manager would have forgotten that they had submitted the same report two or three years previously, or that their manager had moved on, or  those further up the line had also changed and were now in different positions.

The only satisfactory solution might be to focus on outcomes instead of inputs. For example, if you wish to increase business, you might consider an incentive by business function of either reducing the incidence of customer complaints (and by customer, I mean internal as well as external) or increasing positive ratings from customers (again, internal and external) for good service. The problem, then, of course, becomes how you define “good service”.

In short, it seems obvious that it is well-nigh, impossible to design the “perfect incentive scheme”.   In a small business, it may be easier to monitor the activities of a few employees all working within earshot of the boss. In a larger organisation with hundreds, if not thousands of employees and a remote HR department, this may border on the impossible.

This is compounded by the fact that individuals, team leaders, and department heads are all under the same pressure: to perform, and preferably, perform better than they did last year. I remember once been told by a team leader “you live or die by your numbers”. When you have a mortgage to pay and a family to look after, it’s only natural that you do whatever it takes to fulfil that duty. If that means bending the rules, so be it!

One can only accept that there will be a degree of abuse, but as long as this can be effectively policed, we may have to live with it.

I’ve spent more than half my life delivering change in different world markets from the most developed to “emerging” economies. With a wealth of international experience in international financial services around the world running different operations and lending businesses, I started my own Consultancy to provide solutions for improving performance, productivity and risk management.  I work with individuals, small businesses, charities, quoted companies and academic institutions across the world. An international speaker, trainer, author and fund-raiser, I can be contacted by email. My website provides a full picture of my portfolio of services.  

Labels: Customer Care, Leadership, Productivity, Strategy, Teamwork

posted by William Martin @ 11:47