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PonderThis: When Rewards are Out of Whack

May 6th, 2010 · 1 Comment · PonderThis, Thoughts on Life and Leadership

Last week we saw something many did not expect.  We saw senior members of Goldman Sachs enrage members of a congressional committee not by arguing or feigning innocence or even ignorance.  For the most part they seemed mystified.  There is a huge emotional payload connected with their $3 billion profit by betting against investments they were selling.  The congressmen were trying to get a rise from the execs, a sense of contrition or remorse.  But investment banks function largely for the purpose of making money.  They make markets and sell things that someone else creates and like any smart investor, they hedge their bets.

The hubris of the situation may be hard for us to take, especially while we look at our own struggling investment accounts and the unemployment rate.  But we (the larger collective we) allowed investment banks to come into being and have allowed them to operate in just such a manner for over a century.  If a child has been allowed to reach into the cookie jar whenever he or she wants without even a raised eyebrow, you cannot be surprised at the child’s shock at getting their hand slapped for taking a lot of cookies, even if there is a shortage.

This disconnect occurs when rewards and consequences are out of sync with the real outcomes we desire.  Investment banks were originally structured to be the vehicle of supplying capital to businesses for expansion and growth.  But they have operated more like casino’s, making ever more exotic games available for decades.  And this is not the only example of rewards out of whack we can see in the news today.

Transocean, the company whose oil platform exploded and sank in the gulf, is in the news with investigations into negligence, safety issues and even a possible willingness to take advantage of the panic to extricate themselves from liability.  I wonder about the contract terms they had with BP, whose oil they were pumping.  All the slogans about safety do not matter if the rewards systems (formal and informal) are not aligned to support safe operations.

It is ironic, but the people who understand this best in most companies are sales leaders.  I remember years ago working for weeks to develop a new incentive plan for sales at the direct marketing publisher where I was VP Sales.  We tried half a dozen scenarios, modeled and tested.  When we thought we had the right plan, we ran it against the previous 3 years of sales to see if it produced the outcomes we wanted and finally rolled it out proudly to the sales force.  In less than 2 hours, they had figured out a way to game the system and make more money without accomplishing the goals we set out.

And not all rewards are monetary.  The culture of being a tough minded operator and getting more for less makes heroes and heroines of executives who can make it happen.  That is until some unexpected event shows them and sometimes the world that the corners cut to get those results are both expensive and a brand equity night-mare.

The old business saw goes “What gets measured gets managed”.  But it is what gets rewarded both financially and culturally that gets done.

What does your culture value?  And how aligned is it to what you reward?

PonderThis is published to arrive in your RSS/ mailbox on Fridays as a concept to ponder over the weekend and goes to thousands of subscribers on 4 continents.

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One Comment so far ↓

  • Alese Stroud

    Your statement: “it is what gets rewarded both financially and culturally that gets done” is key. The fledgling solar industry is looking for ways to make sure that solar energy installations are rewarded both financially and culturally. We are seeing a ground swell on both fronts, but have yet to reach the tipping point that makes it work.