“Show me the incentive and I will show you the outcome” – Charlie Munger

Misaligned incentives frequently occur in business and they regularly get in the way of success. They can seem harmless, or even beneficial, camouflaged as performance metrics or shiny short term rewards, but when the goals of the individual clash with the ultimate aims of the business the result is far from ideal.

A real world example: a recruiter recently aggressively tried to poach an employee from a client’s firm – the problem was that the same recruiter placed the employee there in the first place less than two years prior. From the recruiter’s perspective this made sense: more placements, more commissions, with a greater chance of success through an existing relationship. For my client though, this was a significant breach of trust, and they’ve now cut ties with the recruitment firm entirely. Had the management spent a bit of time to understand the motivations and rewards of the sales staff, this could have easily been avoided.

This happens often when short term sales metrics are allowed to drive behaviour – a quick win for the sales person, long term problems for everyone else. It’s a bit like using a hosepipe to water your house plants – it’ll do the job but you’re going to get collateral damage.

Note that whilst these are frequently found in sales functions (and often most noticeable when they cause damage), they can be found in all departments of a firm.

What’s the fix? 

Understand what your metrics are incentivising your staff to do.

Sometimes the messaging is unspoken or inferred, so take care to figure out what people are actually acting upon. Take the time to work out what the outcomes are going to be when staff act upon these incentives and rethink your structures to match the real priorities.

• Sales teams: If you’re focused on client retention, measure repeat business and satisfaction, not just one-off results.  
• Project teams: Structure bonuses and measurements around project outcomes – like staying within budget or hitting deadlines – rather than just logging hours – to discourage inefficiency or overbilling.  

Of course, these also come with their own trade-offs – too much focus on client retention may cause a lack of focus on new business development or a lack of desire to push back on problematic clients. Focusing on budgets and/or deadlines may result in cost cutting or rushing. Finding the balance won’t necessarily be easy, but it’s certainly worthwhile.

This often requires a more hands-on management style, rather than relying solely on KPIs or rigid metrics. You get what you measure! The key is not just choosing and monitoring metrics, but being aware of their effects – and being prepared to adjust when needed. Misaligned incentives don’t just reduce efficiency; they can erode trust, damage client relationships, and ultimately cost you in both reputation and revenue. The slightly tougher approach now could save you from far bigger headaches down the line.

 nathan@nbstrategy.co.uk.