Corporate Finance Institute. (n.d.). What is the Fraud Triangle? Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/accounting/fraud-triangle/
Tarallo, M. (2018). Paved with good intentions: How employee incentives can go awry. HRNews. Available from ProQuest in the Trident Online Library.
"Every incentive to perform is an incentive to cheat. You can't have one without the other."
—Mark Hodak, as quoted in Tarallo (2018).
• What are some challenges of offering incentives to increase employee, group, or organizational performance?
• What are your recommendations to organizations on how to avoid employee incentives plans from going awry?
The Fraud Triangle
Full Answer Section
- Creating Unhealthy Competition and Silos: Incentives designed for individual performance can foster a cutthroat environment, discouraging collaboration and teamwork. Employees might hoard information or sabotage colleagues to gain an advantage, ultimately harming overall organizational performance and culture. Similarly, department-specific incentives can create silos, where units optimize their own metrics at the expense of cross-functional cooperation.
- Diminished Performance and Narrowed Focus: Counterintuitively, incentives can sometimes lead to worse performance, especially for tasks requiring creativity or complex problem-solving. A strong focus on the reward can narrow an individual's perspective, making them less adaptable and innovative. The example of call centers rushing calls to meet metrics but providing poor service illustrates this.
- Addiction to Rewards and Escalating Expectations: Once an incentive is introduced, employees may come to expect it, and even demand increasing rewards for similar or greater effort. This can lead to an "addictive" cycle where the incentive quickly becomes less of a bonus and more of an entitlement, requiring ever-larger rewards to maintain motivation.
- Complexity and Inflexibility: Designing effective incentive programs for diverse roles and goals is complex. A "one-size-fits-all" approach rarely works, and plans that are too rigid may not adapt to changing business needs, leading to demotivation if the incentives become irrelevant or unattainable.
- Fairness and Transparency Issues: If incentive criteria are unclear, inconsistent, or perceived as unfair, it can lead to confusion, mistrust, and resentment among employees, eroding morale and engagement.
What are your recommendations to organizations on how to avoid employee incentive plans from going awry?
To mitigate the risks and ensure incentive plans truly drive positive outcomes, organizations should adopt a thoughtful and holistic approach:- Clearly Define and Align Goals:
- Focus on Outcomes, Not Just Activities: Incentives should reward desired outcomes and behaviors that align directly with the organization's strategic objectives, rather than just intermediate activities. For example, instead of just call volume, reward customer satisfaction.
- Holistic View: Consider how incentives for one area might impact others. Ensure incentives encourage collaboration and contribute to overall organizational success, not just individual or departmental gains.
Sample Answer
The quotes and references highlight a critical tension: while incentives can drive performance, they also carry inherent risks, potentially leading to unintended and even unethical behaviors. As Mark Hodak suggests, "Every incentive to perform is an incentive to cheat. You can't have one without the other." This underscores the need for careful design and oversight of incentive programs.
Here's an exploration of the challenges and recommendations:What are some challenges of offering incentives to increase employee, group, or organizational performance?
Offering incentives, despite its potential benefits, presents several significant challenges:- Undermining Intrinsic Motivation: As highlighted by the research, extrinsic rewards can "extinguish intrinsic motivation." If employees are motivated by the inherent enjoyment or satisfaction of their work, tying a reward to it can shift their focus from the task itself to the reward, potentially diminishing passion and engagement once the incentive is removed or if it's perceived as insufficient.
- Encouraging Unethical Behavior and Cheating: This is perhaps the most critical challenge, directly echoing Hodak's quote and the Fraud Triangle (Opportunity, Pressure, Rationalization). When incentives are tied to specific, often narrow, metrics, individuals or groups may feel immense pressure to achieve those targets, even if it means cutting corners, manipulating data, or engaging in fraudulent activities. The focus shifts from true performance to "hitting the numbers."