Compensation Systems That Backfire Incentivizing the Wrong Behaviors

Organizations frequently design compensation systems that inadvertently incentivize precisely the behaviors they want to eliminate, creating perverse outcomes that executives don't recognize until damage is done. This episode examines the specific mechanisms through which compensation systems backfire: sales commissions that encourage short-term deals over long-term relationships, performance bonuses that incentivize sandbagging and risk-taking, and stock options that encourage accounting manipulation. We analyze the Wells Fargo fake accounts scandal as a case study in how aggressive sales targets combined with commission-based compensation created systematic fraud, with frontline employees facing impossible choices between their jobs and their integrity. The episode explores the research showing that financial incentives often decrease intrinsic motivation and increase unethical behavior, particularly when incentives are large relative to base compensation. We examine how leaders can design compensation systems that align incentives with actual organizational values, including the controversial finding that sometimes the best approach is to reduce variable compensation and increase base pay. Through studying both compensation systems that worked as intended and those that created unintended consequences, listeners gain frameworks for stress-testing their own compensation designs before implementing them. Learn more about your ad choices. Visit megaphone.fm/adchoices