Make sure you tie your carrot to a stick

Changes in external incentives and in internal management are powerfully complementary. Giving managers incentives without also giving them the skills, authority, and resources they need to respond to those incentives is likely to be quite ineffectual. The same is true in reverse. Increased managerial authority is not likely to lead to improved care if managers have no incentive to do so. This is why various writers on organizational reform in health care have seen a need for “consistent” change (Harding and Preker 2002). It is not aesthetics that lies behind their observations, but rather the need to combine reasons to do better with this capacity to do better–in the same reform package.

Getting Health Reform Right, p. 215

I’m still finishing up Getting Health Reform Right, so a review is a week or so off. But in the meantime, I came across this passage on the plane last night and thought it held wonderful insight into leadership generally.

Their point here is simple: you can’t expect people to do something if they aren’t incented  to do so, and you can’t expect people do respond to incentives if they don’t have the capacity to do so, i.e., skills and organizational support.

I know I’ve been on the losing end of this equation many times, whether because the incentives upper management put in place were really not wins for us folks down in the trenches or because they had not taken the time to put support structures in place to enable us to act on the attractive incentives they’d set up, or both. The result in either case was the same: the big fanfare accompanying some new initiative quickly gave way to apathy and disillusionment as leadership’s best laid plans fizzled out with no real impact yet again.

The one I’ve faced most often is having my yearly bonus tied to sales goals…when I wasn’t in the sales organization. My work didn’t directly impact how much business the sales organization brought in, it impacted customer experience, internal employee efficiency, or general operational functioning, so there was no way for me to change my behavior to react to the incentive. In the end, whether I got my bonus or not may as well have been tied to a randomly generated number.

The authors provide a great tool (on page 216) to help leaders begin to overcome this problem of disconnected incentives and capabilities: The Six Keys to Organizational Performance, a set of questions leaders can ask to begin to align incentives and capabilities. I found it incredibly useful, so I’ll reproduce it here in its entirety.

Incentives for the Organization

  • What does the organization have to do to acquire the resources it needs to survive and grow?
  • What other constraints or opportunities does it face from competitors, customers, regulators, budget makers, grant givers, etc.?

Incentives for Managers

  • How are managers rewarded or punished?
  • How is this tied, if at all, to the performance of the organization?
  • What channels of reporting, supervision, and accountability exist?
  • What is their potential career path outside their current organization?

Skills and Attitudes of Managers

  • What do managers bring to their work in terms of skills and attitudes?
  • How are these shaped by education, selection, training, and work experience?
  • How do managers see their job? What is their view of their responsibilities?

Authority of Managers

  • What decisions can managers make, both internally and externally, about products, prices, production processes, purchasing, personnel, etc.?
  • Can they hire and fire, make investment decisions, choose strategies, etc.?

Incentives for Workers

  • How, if at all, do the rewards workers enjoy vary with their performance and/or that of the organization as a whole?
  • What determines pay, employment, promotion, etc.?
  • Do they have any significant nonmonetary incentives?

Skills and Attitudes of Workers

  • What do workers bring to their work in terms of skills and attitudes?
  • How are these shaped by education, selection, training, and work experience?
  • How committed are workers to the “product” of the organization as a desirable activity?

I think these questions are a great starting place for any leader to begin analyzing the intersection of incentives and capabilities in their organization to ensure that they’re not misalinged. But I’d love to hear from folks out there: Do you agree? Have you used another method for making incentives more effective? Any real world stories of incentives gone horribly wrong (or right)? Jump in and let’s get the conversation started…

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