Ethics Exchange: Incentives

By Ethics Exchange posted Oct 21,2013 17:21


Jeff Kaplan: As you know, Steve, since the 2004 amendments to the Sentencing Guidelines, incentives have been part of official expectations relating to E&C programs.  Indeed, in 2010, in an FCPA case against Alcatel-Lucent, among that company’s violations of the FCPA internal controls requirements was the failure “to provide appropriate incentives to perform in accordance with [its E&C] program.”   But, as much as with any element of an E&C program, many companies struggle to find good ways to incent ethical and law abiding behavior.   What do you think works in this area?

Steve Priest: Jeff, when I started doing ethics work way back in 1990, I thought the answer to this question was very easy. In the words of Deep Throat of Watergate fame (not the other one), “follow the money.” Get your HR compensation and promotion systems right, and desired behavior will follow. But companies often fail to get this right, for some very good reasons, and for some nefarious ones.

Jeff: I agree that getting compensation and promotion right is critically important.  Indeed, the whole phenomenon of “moral hazard” speaks to the great harm that can come from a misalignment of risks – E&C-related and other - and economic incentives.   

Steve: Right. And the nefarious reason underlying many flawed incentive systems is intentional: companies only want to reward individual short term economic performance because that is how they themselves are measured in the equity marketplace. But there are other reasons for flawed HR systems. Chief among these is that it is hard to incorporate ethics/values/compliance elements in a way that employees and managers find fair and credible. 360 degree review processes work terrifically, but have largely vanished from large scale implementation. So we are left with binary systems (is this employee ethical or not?) which are just stupid. Unethical employees should be ex-employees. Or we see systems requiring managers to evaluate on a scale, which is similarly challenging. (What is the difference between a 3 and a 4 on ethics?)

Jeff: But I also think that companies need to pay attention to the findings of some social scientists that – based on the part of human evolutionary experience that favored cooperative societies over less cooperative ones  – we’re motivated by wanting to do good for others as well as ourselves. To my mind, a truly effective view of incentives should include motivations of that sort, as well as the traditional kinds.

Steve: Yes, and the best systems I have seen are beginning to do so. Systems that define desired concrete behaviors that are aligned with overall organizational values have a chance of promoting the right behaviors. Many of these concrete behaviors have to do with teamwork, respect, and “giving back” to the community. To revert to my classic economic training, however, the “reward” for being evaluated highly on these behaviors needs to be close to or as much as the reward for financial/operational performance in order to be effective.

Jeff: I agree, but also think that one can go a long way with informal recognition.  An example that comes to mind –albeit a fictionalized one - is the  “I touched the ball before it went out, coach,” TV commercial in which the coach in  a basketball game eventually sees that the honesty of his player should be commended, even if it costs the team the championship.   Unfortunately, the coach doesn’t praise the honest player in front of the other players - where it would have had more of an effect. Still, given how much we all like encouragement, this sort of thing can be effective – but managers need to be trained on why and how to do it.

Steve: Jeff, sometimes I have to remind myself that you have been a lawyer and compliance expert for decades! Your perspective is so human. And I think spot on. In the eyes of the Sentencing Guidelines and cynical prosecutors, the formal HR systems are paramount. In the hearts and minds of employees, being appreciated and recognized for acting consistently with shared values is at least as important. One would think that this informal appreciation would be easy, but most of us parents know it is much easier to “coach” using “don’t” than to catch our children doing the right things and praise them. The same is true for managers. We underinvest in training them.



Oct 25,2013 09:43

Hi Peter, I apologize for the technical difficulties you've been experiencing! I will follow up with an e-mail with the content of the blog post.

Oct 24,2013 11:50

Maybe it is just my computer but the entire right side of the column is cut off and I cannot read the entire piece.