How you unintentionally send your employees in the wrong direction
In any organisation, people respond to incentives. Incentives to act, or sometimes to hold back. The problem is that these incentives can be counterproductive without us realising it.
A few examples.
At one company I worked for, we had a commission system.
Sales staff could give discounts on the list price, and their commission depended on the level of discount.
The discount bands were 0–5%, 5–10% and 10–15%.
When we analysed the data, we saw that discounts of 4.9%, 9.9% and 14.9% occurred most often. In other words, behaviour was driven by the system, not by value creation.
We changed the model so that every additional percentage point of discount reduced the commission. The result: EBIT increased by 3%.
Another company relied heavily on transporters for agricultural products.
Transport was priced per ton. During loading, however, a lot of waste (sand and other dirt) was included in the weight. This meant we were also paying transport and processing costs for waste.
Farmers were paid based on net yield, so we knew exactly how much waste was delivered.
We adjusted the system: transporters received a higher rate when the waste percentage was lower. The outcome was clear — transporters earned more, our net costs went down, and the waste stayed at the source.
So what is the essence of a wrong incentive?
It is when a measurement method or KPI creates side effects that undermine the intended result. A person, team or company is unintentionally rewarded for the wrong behaviour. Management accounting, at its core, is about shaping behaviour so that employees act in the best interest of the company.
Can perverse incentives be prevented? Yes — and they should be.
The key is to look at the full process and all stakeholders in a holistic way. Then translate the desired change into incentives that create a positive outcome for everyone involved. This is what we call goal congruence.
A clear and consistent management system is essential for any organisation. KPIs play a crucial role in this. Too often, however, companies rely on easily available and simple financial metrics. Management ends up steering on a limited set of numbers, and that is when things go wrong and poor behaviour gets rewarded.
In practice, many incentive structures have grown over time without conscious design. As management, we are often not fully aware of them anymore. It pays to review them carefully.
We are happy to support you in this, based on both practical experience and board-level perspective.
