The Slippery Slope of Goals & Incentives, by Tim Askew - Guest Blogger. Incentive to perform is often indistinguishable from incentive to cheat

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The Slippery Slope of Goals & Incentives:

 Incentive to perform is often 

indistinguishable from incentive to cheat

By Tim Askew - Guest Blogger

Our friend Tim Askew is the Founder and 

CEO of Corporate Rain, an acclaimed executive

 sales outsourcing company.  This guest blog

 originally appeared in Tim's column on Inc.com 

and his incredible blog Making Rain.

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Management savant Peter Drucker supposedly said, “If you can’t measure it, you can’t manage it.”  The only problem with this frequently cited quote is that Drucker never said it.  In fact, he actually said things quite the opposite.  Like “Culture eats strategy for breakfast.”

Last week I attended a fascinating all-day seminar at NYU’s Stern School of Business titled “Ethics by Design:  How to Use Nudges, Norms and Laws to Improve Business Ethics,” sponsored by Ethical Systems.org, the Behavioral Science & Policy Association and CEO Trust.  There were over 150 attendees, mostly top-drawer academics with a sprinkling of executives and entrepreneurs.  I found it thought-provoking, useful, and even startling.

The day covered many topics, but the general trope was cautionary concerning our ubiquitous business emphasis on quantification, measurement, and goals. 

While acknowledging that goals can encourage persistence and performance, almost all seminar participants emphasized the caveat that rigid goals will have deleterious effects on corporate culture and long-term corporate health.  While historic studies point to the positive impact of goals on increasing business performance, more recent research, including by many of the attendees and presenters, pointed to the the fact that overemphasis  on goals encourages unethical behavior.  The symptoms of this include increased moral disengagement, decreased individual self-regulation, and hazardous risk-taking.

Put another way, setting and pursuing ambitious corporate goals appears to incentivize employees to cheat, lie, and flimflam.  It encourages short-term thinking.  It undermines healthy process and culture.  It puts too much emphasis on the trees rather than on the forest.

The case against the over reliance on metrics was summed up neatly by Lisa Ordonez, Vice Dean at the Eller College of Management at the University of Arizona and by Marc Hodak, professor at the NYU Stern School.  Their presentation was titled “Walking the Tightrope:  Balancing the Incentives to Perform vs. Incentives to Cheat.”

Dr. Ordonez wrote an influential article for the Harvard Business Review in 2009 (with colleagues Maurice Schweitzer [Wharton], Adam Galinsky [Northwestern-Kellogg School], and Max Bozeman [HBS]) titled “Goals Gone Wild.”  Her talk last week was premised on two basic conclusions of her research:

• Goals cannot create self-sustaining motivation.
• Goals cannot be the entire focus of management.

Specific organizational effects Ordonez warns of include systemic problems from narrowed focus, unethical behavior, risk taking, decreased cooperation, and decreased intrinsic motivation.  “Goal setting is management by numbers,” states Ordonez, and institutional incentives need to be assigned very carefully and in the context of principles.

She cites several episodes of goal-setting culminating in corporate disasters.  For example, she points to this year’s compliance calamity at Volkswagen.  Volkswagen had set two demanding goals for itself:  to comply with and effectuate mandated environmental standards and to become the biggest car company in the world.

It did not work out well.  As employees and managers at Volkswagen started work on the aggressive company goals, they quickly realized they could not easily meet the strict American (EPA) and European standards.  Rather than admit that, they decided to cheat.  And cheat massively and systemically.  They consciously decided to engineer their cars to fool the national testers and examiners instead of honestly fulfilling environmental and legal requirements. 

The result is massive fines, loss of reputation and good will, lawsuits as far as the eye can see, and a significantly diminished stock valuation.

Both the recent scandals at the Department of Veteran’s Affairs and BP speak to the results of corner-cutting and dishonesty to achieve stretch goals.

Professor Marc Hodak was even more blunt than Dr. Ordonez.  Hodak said simply,  “Incentive to perform is indistinguishable from incentive to cheat.”  He points to the incentives for corporate executives to lie, exaggerate, and hide financial truths even from their boards of directors through techniques like channel stuffing sales results.
Hodak offers three solutions to ethics/compliance conundrums:

1. Approach your goals holistically and put your incentives in the context of a culture of honesty.
2. Look beyond “performance.”  Bad behavior hides behind good performance.
3. Remember why your are in business.  Be true to your culture.  Always remember who you are.

Ethics and corporate rectitude are not impractical, esoteric matters in the age of compliance.  Ethics is increasingly a practical necessity related to profit and ROI.  In many cases goals do more harm than good and rigid adherence to specific outcomes can be disastrous.

The solution?  I don’t know.  But the answer is surely somewhere near the corner of ethics, culture, and human meaning.

Ethics is not just a matter of doing good or being righteous. It’s actually a selfish thing.  As Danny Meyer of Shake Shack puts it, “It is in our self-interest to be good.”

Dr. Priyavrat Thereja puts it this way:  “If ethics is not the engine of success, in the train of growth, it sure is a guard, with a flag, which may be green, or red.”

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