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Finding perverse incentives is hard, fixing them can be harder

Searching for perverse incentives that can become compliance land mines means messing with people’s pay.

You are not just looking to eliminate potentially dangerous design elements, but also identifying changes to variable plans that preserve as much of the positive power of your incentives as possible, while addressing the risks. This requires a level of trust by plan recipients that the people doing this work understand the pressures faced by front-line employees and have substantial experience with incentives and related governance structures.

This can present an unusual challenge for financial, legal, and compliance leaders. The process forces them to ask: “How do I contribute to the planning and execution of these plans before and after they hit the front-lines of our business?”

Too often, compliance, ethics, and even HR leaders don’t have a seat at that table, so expect push-back with any change.

A good incentive package benefits everyone. However, some might not give it time, and leave the organization, wanting more lucrative and short-term upside, especially where competitors flout such packages. Preparing for those challenges in advance helps to insure a process that embraces all organizational perspectives as well as individual concerns.

A critical analysis of incentives isn’t an attack on goal-setting or the rewarding of performance. It’s recognition that with incentives you don’t just get what you pay for; you can get a lot more, some of which might be unintended and very unwelcome.

Remember that nearly all of the recent scandals were in organizations that had robust and well-articulated codes of ethics and compliance programs. But their incentives and controls combined to create a lethal, unspoken message that cutting corners was tolerable, even desirable.

Think and ask, is it worth considering an investment — internal or external or both — toward making sure that your incentives do not create hidden land mines?

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The prior posts in our series about perverse incentives can be found here.


Richard Bistrong is a contributing editor of the FCPA Blog and CEO of Front-Line Anti-Bribery LLC. In 2010 he pleaded guilty to a conspiracy to violate the FCPA and served fourteen-and-a-half months at a U.S. federal prison camp. He now consults, writes and speaks about compliance issues. In 2015 he was named one of Ethisphere’s 100 Most Influential in Business Ethics. He can be contacted by email here and on twitter @richardbistrong.

Marc Hodak is Partner at Farient Advisors, an independent executive compensation and performance advisory firm. He has taught corporate governance as a professor at NYU’s Stern School and as visiting lecturer at the University of St. Gallen in Switzerland. He can be contacted here.

This post was adapted from an article that appeared in Compliance Week “Is It Time For An Incentive Mine-Sweep?” by the same authors.

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1 Comment

  1. Perhaps a simple internal investment to insure incentives have not created hidden land mines is to conduct a "Fire Drill" or a stress test like banks must do maintain capital levels. To send people for ethics training, to have a code of ethics, to have a compliance program, these are all well and fine. The real questions are, is it good enough? will it work the way we hope it does? The decision to conduct a compliance fire drill would have to come from the top,and as the authors state this means "messing with people's pay" as long as the bonuses are flowing the incentives are working, and no one wants to be the skunk at the garden party. The advantage for the people at the top, if there are problems, is that they discover it themselves and they can self report. This would demonstrate to regulators they are thinking about compliance and wanting to make their systems better and keep their organizations safe.

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