U1 Post – The Ethics of Incentive Systems

I have a coworker who used to work in the mortgage banking industry, pre-financial collapse. He got out of the business before things started to crumble, saying that he saw the writing on the wall. He got a deep sense of foreboding that things were building up, and he did not want to be around for the eventual peak. What he saw was alarming; people were expected to close loans. They were expected to close so many loans, in fact, that it was common to get fired for not meeting your quota, then subsequently get hired by a competitor, then fired again for not meeting your quota there, in a cycle that could happen twice a year over and over again. Nobody asked how you had to get your results.

Consider, more recently, the events at Wells Fargo, where tellers across the country were found to be opening accounts without knowledge of the customer due to intense sales goals that were tied to employment. Though many banks state they have systems to catch these fraudulent acts, many workers state that the culture of force-selling is rampant across all the brands in the industry. (Egan, 2016).

Incentives and reward systems are common in modern management practice; it is, after all, the expectation of managers to motivate a staff to obtain a particular goal. Incentives are a form of bargaining, exchanging some resource for work, and are the premise behind even such staple concepts as work-for-pay. It can be seen not only in sales competitions or above-and-beyond callings, but in position expectations and performance requirements. The question of ethics arises when we consider how incentive systems like quotas, job expectations, or competitions can lead to corners being cut, results being forged, or at worst fraud being committed.

Behind these ethical breakdowns are important concepts to consider. The first is that “incentives are understood as a form of power” on the part of the organization over the individual (Grant, 2011, p. 50). The organization has some finite resource, be it employment, money, status, or other desirable conditions or items, which leads to individuals competing for it. The economics and psychology behind people’s reactions to scarce resources are obvious: when humans need something – say, a paycheck to feed themselves or their families – they will do what they have to do to obtain that resource.

Knowing this, organizations have a responsibility to ensure that finite resources are distributed fairly, and that the path towards obtaining these resources does not lead to unethical behaviors. Undue influence through the creation of forced compliance pressure creates situations of temptation. It is a responsibility of organizations to recognize when their systems cause unneeded temptations for individuals and correct those systems to eliminate the risk of temptation.

These temptations may manifest themselves in either direct or indirect behaviors; the bank tellers fraudulently opening accounts would be a direct behavior, since they caused the condition. However, individuals can also be tempted to not act, thus indirectly causing some result. Consider the work of Bazerman and Tenbrunsel (2014), who found that blindness, both motivated and indirect, was an issue in which individuals simply ignored behaviors or situations that would lead to undesirable conditions for themselves or their organization. By failing to act to stop some unethical behavior, an individual can be just as accountable as if they had done the deed themselves.

Organizations must be particularly aware of situations in which temptations can be rationalized, as these can easily turn into an unethical action. For example, even an individual acting from an ethical teleological point of view, in which they are looking for “the greatest good”, can be tempted to act against the favor of the larger group of people. Looking at the situation of the Wells Fargo customers, many tellers may have rationalized the “the customers wouldn’t even know” or be harmed when the teller opened two bank accounts when only one was requested, however that teller losing his or her job would be disastrous for a family that depends on that income for survival (Egan, 2016). Therefore, isn’t the greatest good to preserve that family, especially if customers are none the wiser or necessarily hurt from the action?

In this situation, the organization has created a firm ultimatum, leading to questions of whether individuals really had a choice to act ethically or unethically. Grant (2011) muses “can an offer be so attractive, so difficult for a vulnerable person to resist, that it is tantamount to coercion?” (pg. 52). Indeed, when “the cost of refusing the offer is ‘prohibitive'”, the incentive structure must be reevaluated (Grant, 2011, p. 52).

In order for organizations to utilize this knowledge and design systems which do not lead to unethical behavior, I propose taking a through look at both goal design as well as the ultimate impact. In looking at goal design, it is imperative that organizations incentivize the right metrics. “When employees behave in undesirable ways, it’s a good idea to look at what you’re encouraging them to do” (Bazerman and Tenbrunsel, 2014). As such, I encourage program designers to ask the following questions prior to creating their systems:

  • What process or metric needs to be the focus? Oftentimes, sales are the incentivized metric, while profitability or efficiency would be better suited and lead to more ethical behaviors (Bazerman and Tenbrunsel, 2014).
  • Have I provided the resources to achieve this goal ethically? By providing an objective without a means to achieve it, organizations leave themselves susceptible to whatever the outcome becomes. Having a focus on training the right skills and providing the right tools will help ensure that individuals have an ethical course to follow that is the path of least resistance.
  • Is the goal attainable? The challenge here is to provide a goal that is challenging, but not impossible.

The other actionable factor for organizations to consider is the evaluation of the ultimate impact. This involves extrapolating and forecasting scenarios, then weighing the potential effects. This can align itself to any one of the ethical perspectives in terms of what outcome is most desired, but organizational leaders must ask themselves these questions:

  • If I were expected to achieve these results, how would I make it happen? This puts the program designer into the shoes of the people who will be expected to perform. This perspective shows the designer the options available to the employees, as well as which are the easiest. The goal should be to make the ethical path the easiest to engage in.
  • What are the side effects? Grant (2011) stresses the need to consider how these programs can impact seemingly unrelated factors like organizational culture, or areas in which power is exerted where the organization “ought not to have an particular power” (p. 55-56).
  • Who has done something similar in the past and how has it gone? Bonde et al. (2013) urges decision makers to reflect on the result of their choices, to learn for next time; there is no reason that advantage cannot be gained from similar known situations occuring outside of the organization as well. For example, it would be prudent for other banks to take action after the issue came to light at Wells Fargo. Learning from others’ mistakes as well as our own is key to moving forward and promoting better ethical results.

Evaluation of the answers to these questions based on one of the ethical perspectives (consequentialist, duty, or virtue), will lead to a better understanding of the end result of the incentive program and whether or not it will be a desirable outcome.

Organizations have a responsibility to both encourage and facilitate the ethical behavior of their employees. By setting goals, job expectations, or quotas that can tempt employees to act unethically, and not providing tools or knowledge to help employees act in the most ethical way, organizations are violating that fundamental responsibility. By employing the recommendations above, the ability to understand the full impact of adopting and incentive system for performance and evaluate unintended consequences can be substantially increased.

References:

Bazerman, M. E., & Tenbrunsel, A. E. (2014, April 31). Ethical Breakdowns. Retrieved September 22, 2016, from https://hbr.org/2011/04/ethical-breakdowns

Bonde, S., Firenze, P., Green, J., Grinberg, M., Korijin, J., Levoy, E., Naik, A., Ucik, L., & Weisberg, L. (2013, May). A framework for making ethical decisions. Retrieved September 22, 2016, from http://www.brown.edu/academics/science-and-technology-studies/framework-making-ethical-decisions

Egan, M. (2016, September 22). ‘Wells Fargo isn’t the only one’: Other bank workers describe intense sales tactics. Retrieved September 22, 2016, from http://money.cnn.com/2016/09/22/investing/wells-fargo-fake-accounts-banks/

Grant, R. W. (2011). Strings attached: Untangling the ethics of incentives. Princeton: Princeton University Press.

 

One Comment

  1. Ashley Savannah Wilkerson September 26, 2016 at 2:40 AM #

    Dear Courtney,

    It is quite unfortunate the responsibility your coworker underwent at his or her firm. That negative cycle of being replaced by one firm to then be picked up by another firm can not yield positive work performance or generate the necessary productivity requirements.

    You make an interesting point regarding incentives by stating that monetary compensation places the power in the organization where an individual is employed. But I wonder if this is true of most organizations. In my experience when an employee asks for a raise they are usually doing this on the grounds of providing detailed evidence on why they deserve a raise or they imply they will leave that job if they do not obtain the monetary compensation they deserve. I had a coworker who has threatened to leave her position at work 3 times over the course of 4 years and every time this happens, our supervisor increases her pay and my coworker stays in said position for another year.

    Based on this experience I have a slightly different out look on incentives and power. On one hand they can provide upper level managers with a great tool, and on the other hand, employees can take that power back and use it to their own benefit.

    I would love to hear your thoughts, and discuss this matter further.

Leave a Reply

Skip to toolbar