Changing the System Changes the Behavior

There is a wealth of research indicating that employees and managers will alter their behavior based on the incentive system in place for that behavior. Self-evident, no? We do what we need to do to get rewarded.  Very recent research by Shawn Cole, Martin Kanz and Leora Klapper, however, indicates that this is not as easily understood as it first seems. Not only do we alter our behavior to fit the incentive, we apparently alter our view of performance based on the type of incentive we receive!

Incentives Change our Perception

In a study of loan officers, Cole and his colleagues found that origination incentives (simply receiving a bonus for originating a loan) resulted in a 16 percent increase in lending compared with a high-powered incentive (bonus based on loan performance) and reduced profitability of 5 percent. On the other hand, when the incentive was tied to loan performance, the detection of bad loans increased by 11 percent, boosting profitability by 3 percent.

Here’s the real dilemma. Timing of incentives also impacts effort, e.g. if the incentive is paid relatively immediately, people will put more effort into the process than when the incentive is delayed.  We tend to overvalue incentives today versus 90 days from now which means that basing incentives on longterm performance may have an upside in quality of work, but only to the extent that the downside of delayed gratification doesn’t get in the way.

What does this mean to you? First, look at the structure of your incentive program and see if you are incentivizing the low end (origination) or the high end (long term performance). If your incentives are based entirely on the origination side (sign-ups, enrollments, clicks), then it is likely that your people are over-estimating the value of each origination. If your incentives are based on the higher end, then you need to make sure that the incentive itself is worth waiting for.  Keeping the incentive the same, but changing the payout to later versus now, will not work. The incentive down the road has to be worth the extra effort.

Thought for the Week: A Focus on the Future

Change behavior, not people. Change processes, not standards. Change results, not goals. Mike Ferretti, CEO, Great Harvest Bread

CEO Report CoverThe year 2011 is rapidly coming to a close and, while it’s somewhat artificial to consider January 1st, 2012 as a special day where we are allowed to change, it is still a milestone that causes us to reflect on the past and plan for the future.  New Year’s resolutions are a tradition where we reveal our intent. By itself, a resolution doesn’t change things, but it sets us up to go on record with our priorities for the coming months.

Northwood University has just published my newest “CEO New Year’s Resolutions:  A Focus on the Future” for 2012.  It’s a free report that you can read or download by clicking on the link above or by visiting www.Northwood.edu and choosing the button at the top left corner on their homepage.

For this report, I contacted 50 CEOs of a diverse collection of organizations. These include franchise organizations like Great Harvest Bread listed above, large company CEOs like Tony Hsieh of Zappos and Jere Brown of Dimension Data Americas, non-profit CEOs like William Jones of Focus Hope and Viveka Rydell of PDI Surgery and leaders of tech companies like Andrew Schrage of MoneyCrashers.com and Sam Shank of HotelTonight. There are manufacturers represented like Ron Beebe from Euclid Industries and community organization leaders like Mike Woody from the Midland Tennis Center as well.

While this is not a statistically significant sample of all CEOs nationwide, it is still interesting and informative to see the consistency of the message in this report. As you read it, you get the impression that the leaders of many of our organizations are not cowed by current economic and political conditions but are instead focused on bringing growth and stability to their business in order to benefit their shareholders, their employees and their communities.  As I say in the introduction to the report, these business leaders also don’t represent the “1%” nor do they represent the “99%.” Instead, they represent the heart of American free enterprise.

I hope you find the time to check out the report. I would love to hear your feedback and comments.

Tony Hayward: The Indefensible CEO

To write a blog titled, “In Defense of BP CEO Tony Hayward” takes some guts. Steve Tobiak is a prolific and influential blogger for Bnet.com on topics of leadership and management and wrote this entry last week as a dissenting voice in the call for Hayward’s head.  While I truly appreciate Tobiak’s ongoing effort in his blog to challenge the status quo, I think in this case, he doesn’t have much of a case to stand on.

The problem is, if you are the CEO of BP, you have to be accountable. No different than Rick Waggoner for GM, Hayward is directly or indirectly responsible for the continued culture of BP which clearly focuses more on production and efficiency than it does on responsibility. I also have the advantage of having met with the leadership of BP a few years ago when a friend and colleague was a senior manager there. The results of the Gulf Oil spill, and the actions that have been taken since then, are a direct result of the culture that BP has created. And like it or not, Tony Hayward is the keeper of the culture.

Tobiak argues that one of the primary issues is that Hayward finds himself in “the mother of all no-win situations.” This is clearly true. With recent reports that the gulf oil spill is producing exponentially more oil per day into the waters than was previously stated, there is hardly a scenario where BP “wins.” But to say that Hayward “finds himself in…” is to imply that he was a passive player.  I would buy this if there were no evidence that BP knew or should have suspected that disaster was likely on the horizon, but that is not the case. As we have heard over the last few weeks, there were many opportunities to turn the situation around, none of which was taken by BP.

Oil Slick  Amongst other arguments, Tobiak also presents Hayward as a working-class kind of guy who “worked his tail off to get where he is.”  Ok. He worked hard to get to CEO, but I’m stuck with a bit of “So, what?” If you are the leader of the organization, you are expected to work hard and it is likely you worked hard to get to your current position. This defense-by-work-ethic doesn’t work. Try that defense on the shores of Louisiana and I think you’ll see it is not compelling.

The point here is that leaders have to take accountability for not only their personal actions but for the actions of the culture they maintain. One of the most notable observations I made when I had a chance to meet the leaders of BP was that they were almost cult-like in their obsession with efficiency while at the same time being obsessed with safety issues in the office. They had instituted a ton of safety measures after the Texas disaster, but most were cosmetic. This is a company, and a CEO, with ego of immense proportions.

So, Steve, as much as I enjoy your blog and the fact that you are not afraid to take on the conventional wisdom, I have to say you missed it this time. Tony Hayward has, over the weeks, had many opportunities to show the true values and principles of a strong leader. Yes, he is faced with a challenge of magnitude that few leaders will have to face, but that doesn’t excuse his role in the mess.  With the power and influence comes the responsibility and I’m afraid that responsibility is going to be Hayward’s to bear.