The effectiveness of targets and incentives is affected by a complex interaction of multiple factors. Fortunately, many of these issues fall into a pattern. Over thirty common issues have been identified and documented as part of the ROKET-DS target and incentive design diagnostic toolkit, developed by Made to Measure KPIs.
Poor management behaviours are a critical issue, as they often magnify other target and incentives problems. Management failings typically fall into one or more of these three buckets...
Rules require enforcement, or the threat of enforcement, to be effective. Any visible failure to enforce rules relating to targets or incentives can lead to rapid collapse of that system. Weak enforcement, whether deliberate or accidental, is an ‘accelerant’, it will not normally cause failure on its own, but it will magnify the impact of other issues. Collapse will often show as cheating, disengagement or complaints.
A high-profile series of examples of weak enforcement have come from HSBC. HSBC have been repeatedly prosecuted for anti-money-laundering (AML) failings. One of the more prominent series of breaches resulted in a $1.9 billion fine for the bank in 2012. It would be surprising if the lack of anti-money-laundering enforcement was not driven, directly or indirectly, by the desire to hit profit targets and personal bonuses.
Negative leadership behaviour role-modelling
The members of any organisation will usually closely ape senior management behaviour. A leader who is seen to cheat, bend rules or break the law will be perceived as giving approval to the rest of the organisation to behave in the same way.
In September 2016, the US bank Wells Fargo was fined $185 million for opening two million checking and credit card accounts without the consent of its customers. On October 12th 2016, John Stumpf, the CEO of Wells Fargo, stepped down. Stumpf received a lifetime ban from the banking industry and was strongly criticised by the outgoing Chair of the Board of Governors of the Federal Reserve System for ignoring the bank’s poor risk management programmes and failure to initiate any serious investigation into sales practices.
Intense management pressure
There are many ways in which a manager can apply pressure to their underlings. It can come in the form of shouting, frequent requests for updates by email, bullying, public reprimands or intentional humiliation. Whatever the form, high levels of management pressure can push people to do things they would not normally be comfortable doing. The basic desire to retain social status and the ability to feed and clothe your family can be a very strong motivator.
In Wells Fargo Shelly Freeman, who ran the Los Angeles region until 2009 then the Florida region, had district managers 'run the gauntlet'. This involved dressing in a themed costume and running down a line to a whiteboard to report their sales numbers. During the period Q2 2007 and Q4 2012 sales-practice misconduct increased three-fold.
Setting effective targets and incentives isn’t just about finding the right KPIs to target and setting the bar at the right level. Time and again we see that leadership behaviour counts and is closely observed and aped by subordinates.
To explore all 33 failure modes that form the full diagnostic, head to the K2 Enterprises course GAMED: Why targets and incentives fail and how to fix them.