Incentivising the Right Behaviours

As a person who often travels for work and has taken many flights over the past few working years, I’m seldom proud of the fact that I’ve yet to miss a flight (touch wood). A recent trip to the airport, which almost cost me said record, revealed a large flaw in the incentivisation process of most airlines. That being, if you arrive late, they call out your flight number and like magic, you get priority treatment. No long queues and no waiting – it’s a quick runway to your flight and off you go.

After this experience, I’m almost 100% motivated to show up 30 minutes late to every corporate flight, or at least wait in the airport lobby until my flight is called, despite my risk averse behaviour. Psychological egoism is the view that humans are always motivated by self-interest and selfishness, even in what seem to be acts of altruism. Through behavioural economics we understand that humans are rational beings and respond better to the prospect of gain and will act selfishly if there’s no penalty; “egoism comes before altruism”[1].

As someone who designs incentive programs for organisations and employees, this stark realisation begs many questions: Do more people arrive late? Is this unintended incentive encouraging the wrong behaviours? Is it possible for airlines to operate efficiently, getting people on flights on time, whilst still penalising those who arrive late? How do incentives more broadly influence the behaviours of individuals? Furthermore, what are the “right” behaviours and how do we define them?

A study by Radford [2] revealed that fast growing, successful organisations do a good job of identifying the behaviours, skills, and capabilities they need in the organisation to deliver on their strategy [3] – so the “right” behaviours are relative to the objective of the individual or organisation doing the incentivising. A lot of organisations fall short when they focus on the behaviours they don’t want and not on the positive behaviours that can be linked to success and growth.

A knee jerk response could be to make individuals pay. Airlines could reap the benefits as they make more money from you being late, and it’s a proven method (excess baggage allowances). However, this behaviour can also lead to negative reactions from customers and an overall bad customer experience. I can see the headlines now: “money hungry airline goes for quick cash grab”. But what would happen when the fault lies with the airlines, such as flight delays that cause long queues? Customers are now having to check in late and it’s not their fault, so who pays?

A more suitable action could be to incentivise those ‘right’ behaviours by awarding loyalty points to people who get in on time. It’s already a controllable points system which airlines can individually govern and reward individuals accordingly. As a consequence, those who are late are now “leaving money on the table” by having to jump the line. Make it a point for the airline staff to say, “You don’t get your bonus check-in points.”

Customers still get on the plane, everything runs on time and now your loyalty member base has grown.

This type of rewards and recognition process will have a two-tone effect on behaviours of not only rewarding good behaviour – checking in early – but also negatively impacting bad behaviours –  loss of benefit/leaving money on the table. Positive reinforcement is commonly accepted within behavioural science as being more effective, where experts favour utilising reinforcement (something is added/removed to increase the likelihood of a behaviour) over punishment (something is added/removed to decrease the likelihood of a behaviour)[4].

How does this all connect to the broader concept of incentives at large? As both commissioner Hayne’s recommendations, following the recent Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and Sedgwick’s report pointed out, incentives are currently operating in a way that seeks to punish the wrong behaviours rather than incentivising the right ones.

“How’ as well as ‘what’ is important because it is not now, and cannot be, disputed that variable remuneration can pose an unacceptable risk of promoting behaviour that is inconsistent with the interests of customers” [5]

Quite often what we see is this concept of altering incentive payouts for behavioural standards through ‘consequence management’, rather than the promotion of preferred behaviours. For example, bonus payments are tied to financial KPIs, the ‘what’ actions, which are negatively adjusted by factors such as compliance and behaviour, the ‘how’ actions, through a consequence management process. This line of thought, although a step in the right direction, doesn’t seek to incentivise the ‘right’ behaviours. Rather, it punishes the wrong behaviours and can leave individuals at war with compliance/behavioural standards, as there’s no real reason to go above and beyond. Compliance behaviours become a box ticking exercise for incentive payments and not a motivation of preferred behaviour.

How do we get the balance right around what should be incentivised? Should behaviours be part of what you incentivise rather than leaving it to compliance or reactive consequence management? What needs to be done is that organisations should revisit the fundamentals of their incentives and their link to the organisation’s purpose. To take a leaf out of Google/Alphabet’s book, there is a need to change from “don’t be evil” to “do the right thing”[6].

Commissioner Hayne’s recommendation 7.4 states that, “as far as possible, legislation governing financial services entities should identify expressly what fundamental norms of behaviour are being pursued when particular and detailed rules are made about a particular subject matter”[7]. This demonstrates a need to define what good and great behaviours are, prior to delivering punishment for poor behaviours or passively rewarding ‘compliance’.

It’s not enough to include behaviours in an incentive plan’s payout measurement, the need is there to define what good performance is and by extension what good behaviours look like and rewarding those behaviours. For an airline, it’s defining and rewarding that 2 hours to 45-minute window arrival time (domestic); for a banking institution, it’s putting the customers’ interests first.

Having the right incentive in place, which drives the right behaviours, to support intended outcomes can be a powerful recipe for success. Is your incentive design rewarding the right behaviours? What are the unintended behaviours of your current plan? Are you over-reliant on consequence management to deal with negative outcomes? We recommend any good incentive plan be independently reviewed periodically.

Is your incentive plan due for a check-up? Attracting, motivating and retaining the best talent is one of the greatest obstacles to business growth in competitive industries. That is why it’s important to have remuneration plans and performance-based programs that emphasise the combined value of pay and benefits. Aon’s remuneration consultants know how to transform HR challenges and requirements into remuneration solutions aligned to your specific business objectives.

[1] The Data of Ethics. Spencer H. (1907)

[2] Radford is part of Aon plc (NYSE: AON). For more information, please visit radford.aon.com

[3] What are Turbocharged Tech Companies Doing—and You’re Not? Brooke Green, Cindy Edwards, Tyler Tokarsky (2018). Radford.

[4] The analysis of behavior: A program for self-instruction. Skinner (1961)

[5] Sedgwick Review Report, I;Transcript, Matthew Comyn 19 November 2018, 6535-6; Transcript, Brian Hartzer 22 November 2018, 6868, 6872; Transcript, Andrew Thorburn, 26 November 2018, 7043; Transcript, Shayne Elliott, 28 November 2018, 7322.

[6] Under Alphabet, Google ditches ‘don’t be evil’ motto for ‘do the right thing’. Jordan Vallinsky (2015). Digiday

[7] Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Volume 1. 1 February 2019, 496; Commissioner K Hayne.