It's fairly common that the CEOs I work with tell me that they aren't happy about certain outcomes in their business. Common issues I hear include issues around product quality, sales volume, profitability, or even on-time delivery. They're usually upset because they've tried to get their team to change and improve those outcomes, but to no avail. But that's because they're typically barking up the wrong tree. If you want to change outcomes, you have to change the incentives.
If you've read the best-selling book Freakanomics, or even paid attention to the last few Nobel Prize winners in economics, you might be familiar with the emerging field of behavioral economics, which is really the conversion of psychology with economics. What we've learned is that you need to understand individual psychology and motivations better if you want to change someone's behavior when it comes to work. And the best way to change someone's behavior is to change the incentives or rewards that is driving their behavior.
Ultimately, the behavior of a group of people is a summation of each individual making rational personal economic choices. If you can predict the individual choice based on the incentives and disincentives, you can predict the behavior of the group and the hence the entire system. So if you don't like the outcomes, go back to the incentives.
Let's consider the example of a salesperson who you pay a high base salary to as well as a small commission. The message that person gets as a rational economic actor is that no matter how hard they work, they will only get a little bit extra in the form of the commission. That person might rather play more golf knowing that they don't really have any incentives to work harder to close more deals as long as they put up minimum acceptable sales figures, they can work on their handicap.
If you flip that example around, where you pay the salesperson a big commission and a smaller base, incentives are instantly aligned with closing as many deals as they can if they want to earn more money. I doubt you'd find this salesperson on the golf course, unless it was with clients looking to spend a bunch of money.
But this doesn't just apply to sales: it works in every area of your business, including quality, operations, and on-time delivery. If you give a production team a bonus based on the volume of their work, for instance, you just created an incentive that doesn't value quality. Similarly, if you create an incentive around quality, your production levels could take a hit. Again, it all comes down to what behaviors you are rewarding.
I wrote a previous article about how 8% is kind of a magic number when it comes to the amount of a financial incentive needed to actually create behavior change. In other words, if you really want to create an incentive for someone to change, you need to reward them with at least an 8% increase in their compensation. If you're only offering a 5-6% incentive, you might not get the change you were hoping for.
But when you get it right, and dig down to find the right incentive lever to pull with your employees, the impact can be almost immediate. I recall talking to a CEO recently who was frustrated by the outcomes in his business. When I framed the problem as actually being about the incentives, I could almost see the lightbulbs going on in his head. He suddenly realized what he had been missing all along and made a change the very next day to correct the situation.
So if you're frustrated by an outcome in your business, and you've struggled to find a way to get your team to make an adjustment to fix it, take a fresh look at what behavior you're actually incentivizing. If you can do that, you'll find that those outcomes issues that have been plaguing you forever can disappear overnight.