How you unintentionally put your employees on the wrong track.
In an, we have many incentives. Incentives to do something, or to refrain from doing something. Unfortunately, these incentives are sometimes counterproductive. We often don’t realize that…
A few examples:
A company I worked for had a commission system.
Sales representatives could offer discounts on recommended retail prices, and their commission depended on this
discount. The ranges were 0-5%, 5-10%, and 10-15%.
Analysis of the discounts offered indicated that 4.9%,
9.9%, and 14.9% were the most common. The commission system was adjusted; every percentage point of discount reduced the commission. The result: EBIT increased by a full 3%!
Another company made extensive use of transporters for agricultural products.
The price was per ton. However, during loading, a lot of tare (sand and waste) was collected. Therefore, the transport (and disposal) also had to be paid for!
The farmers were paid for the net proceeds. So we knew exactly how much tare was delivered.
The system was adjusted: the transporters received a higher rate the lower the tare. As a result, the transporters were paid more, and we as a company had lower net costs… and the tare remained with the farmer.
What is now the core of a wrong incentive?
That a measure (or performance indicator) has side effects that harm the intended (higher) result. A person, department, or company is unintentionally rewarded for bad behavior. Management Accounting is the field that deals with employee behavior to motivate and guide them in the best interest of the company.
Can perverse incentives be prevented, and how? Yes! By considering all stakeholders and their roles in the process in question holistically. Then, the intended change must be translated into an incentive that delivers a positive outcome for everyone involved. We call this “Goal Congruence.”
A clear and consistent management system is essential for every organization. Performance indicators play a crucial role in this. Unfortunately, it’s often too easy to use readily available and easily measurable financial indicators. Too often, management relies on a limited number of key figures. And then things go wrong, and bad behavior is rewarded.
Unfortunately, as management, we’re often unaware of the various incentives that have been built in over the years. Take a closer look! We’re happy to help you with this, based on our knowledge and personal experience!
