Incentive Plan Driving Unintended Behaviors? Consider These Strategies

Incentive plans have long been a cornerstone of organizational strategy, aiming to motivate employees and drive behaviors that lead to enhanced business outcomes. However, even the best-intentioned incentive structures can unintentionally create “perverse incentives” — situations where the rewards encourage counterproductive or even unethical behavior. The challenge, particularly for organizations in industries like healthcare, is designing incentive systems that promote high performance and do so in a way that aligns with ethical standards and legal requirements.

This article will explain how reasoned, forward-thinking incentive plans:

Consider human-centered principles; and,
Anticipate participant interaction and response.

The Cobra Effect: A Lesson in Perverse Incentives

The “cobra effect” is a good example of the “perverse incentive” concept. In colonial India, the British government offered a bounty for every dead cobra to reduce the population of venomous snakes in Delhi. Initially successful, the program led to an unexpected consequence: Enterprising individuals began breeding cobras to cash in on the reward. When the government ended the bounty program, breeders released their now-worthless snakes, exacerbating the problem and leaving the government in a worse position than before.

While cobras are less of a problem today, the principle remains applicable in modern business environments. There always will be a subset — no matter how small — of the sales team that will try to “game” the incentive plan to their advantage, and their strategies will differ based on individual personalities and motivations. While deeply unethical cases are likely few and far between, more subtle and subconscious examples of this behavior are common and often go unnoticed.

How Does This Behavior Appear in Incentives?

What might this look like in practice? Salespeople might:

Manipulate their sales figures to meet targets by delaying reporting sales until the next quarter, creating a false sense of achievement and distorting the organization’s sales data.
Focus on selling higher-margin products that may not meet customer needs but yield higher commissions, leading to customer dissatisfaction and damaging corporate reputation.
Prioritize short-term gains by offering excessive discounts or promotions to meet targets, sacrificing profit margins and long-term customer satisfaction.
Exploit sales timing to maximize commissions, distorting sales data and creating artificial performance peaks and troughs that afford them lower goals in subsequent years.

The Risks of Poorly Designed Incentive Plans

An incentive plan that’s not carefully structured can expose your organization to a range of risks by:

Encouraging employees to engage in unethical practices or poor judgment to meet personal goals.
Undermining critical policies designed to ensure ethical marketing and proper medical treatment.
Damaging corporate reputation, which may take years to rebuild.
Introducing legal liabilities that could lead to significant financial losses.

However, by incorporating human-centered design into your approach, you can drive ethical behavior and achieve high performance.

Below, you will find three considerations to move you and your plans forward.

1. Account for Unique Salesperson Personas

Effective incentive plans align role-specific requirements and behaviors that support the organization’s long-term goals. Unfortunately, most plans are “one size fits all,” which can create dissatisfaction with how efforts are rewarded. Use clear, measurable and personalized objectives wherever possible to minimize ambiguity and the desire for manipulation.

Using personas based on artificial intelligence (AI) to react to incentive plan designs, you can:

Predict how salespeople may game the incentive plan; and then,
Preemptively close exploitable design loopholes.

2. Communicate Clearly and Consistently

A lack of transparent communication can lead to confusion and misinterpretation, allowing sales representatives or other employees to make assumptions about how to meet targets. To avoid this, clearly explain plan details, including appropriate language around unethical and noncompliant practices.

Use AI-powered triggers to proactively reinforce the importance of adhering to legal and ethical guidelines, especially for reps who may be close to a critical performance threshold or may be dealing with highly sensitive customers. Your communications also should emphasize expected behaviors and celebrate examples of employees who excel in the right ways. These can be tailored for specific personality types and based on the time period when they are being sent to the field team.

Also, don’t shirk on two-way communication. Listen to how the field’s interprets the plan. Again, AI may help you do this efficiently and at scale.

3. Anticipate and Mitigate Risks

Before rolling out any incentive program, have legal, compliance and governance teams review it to ensure conformance with industry standards and regulations. Establish a comprehensive approval process for every sales role and install consistent oversight across all business units and markets.

Additionally, periodically audit employees who are eligible for incentive pay. Review a sample (e.g., at least 5% of sales reps) to ensure program fairness and compliance. Build mitigation strategies (e.g., automated quality checks, AI-based pattern recognition algorithms) into the system to address potential risks.

Implement and Improve

Human-centered plans that promote the right behaviors, ensure clear and consistent communication, and anticipate potential risks can help you avoid the pitfalls of incentive systems.

With intentional design and proactive management, you can foster an environment where employees are motivated to excel while upholding professional, ethical standards.

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics: