Aligning Incentives

Feb 4, 2022 | Articles

Source: HR Daily Advisor
Author: Lin Grensing-Pophal, Contributing Editor

In a previous post, we discussed the importance of aligning employee incentives in order to optimize cooperation and collective action within an organization. Even the strongest leaders will struggle to achieve that cohesiveness if team members’ purpose doesn’t match. In this post, we discuss some strategies for tempering competing motivations and improving alignment.

Holistic Incentives

A classic example of misaligned incentives, and one we used in our previous post, is commission-based compensation for your sales team. When poorly implemented and managed, sales staff might be inadvertently incentivized to do just about anything to make a sale. This is true even if it puts tremendous strain on the production team, sacrifices long-term goals for short-term goals, or exposes the company to legal and regulatory risk.

One strategy to temper this conflict is to make incentives more holistic. For example, a commission structure could condition receiving a portion of the commission on a customer’s actually spending a certain amount of revenue over a certain period of time, or base the commission on profit—which factors in the costs of production—as opposed to just revenue.

Organizationwide Goals

Sales teams are focused on selling, and compliance teams are focused on compliance, but there are broader goals that can be used to collectively incentivize these teams. All teams should be concerned about the company’s profitability and revenue. A compliance team won’t have a job if the company doesn’t make any money, so their risk aversion should be tempered by the reality that they can’t say no to everything.

Flexible Evaluations

Rigid incentives lead to rigid actions. If a production team has a strict mandate to stay below a certain error rate, they’re going to push back hard against making complex or custom orders that are more prone to error. By allowing flexibility in evaluations, companies encourage business functions to work together more collaboratively. For example, the production team could be given a less strict error rate on a case-by-case basis for unique orders.

Teams will work together effectively if they share common goals, so identifying and addressing sources of conflict will boost alignment and promote effective teamwork.

Lin Grensing-Pophal is a Contributing Editor at HR Daily Advisor.

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