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Posted February 16, 2009 by Gareth Horton

Good article Neil,

Choosing what to measure and doing it well is critical.

Poorly thought out and costed incentives to individuals that are not correctly aligned with business objectives and the long term profitability and health of the business itself are common.

I have sometimes seen the scenario (vastly simplified) where salespeople are effectively in the situation of being able to sell £20 notes for £18.  Plus, with many revenue based incentives, the more they sell, the richer they become and the poorer the organization becomes.

This situation is usually in the cases of complex, long-term projects or, as we know, with long-term returns from financial intruments of dubious value.  The complexity tends to mask the problem, but incentives have to be much simpler and short-term, leading to this disconnect.

As you say, where there is an opportunity to game the system for personal financial gain, it will be taken.  This is especially true when they are really just playing by the rules within the structure laid down by those higher up, even when they can see that it will be to the detriment of that organisation.

This gets even more acute when the environment consists of multiple discrete organizations, such as the mortgage issue.  The broker's job is to sell a mortgage and be duly compensated that month/quarter, not to worry about what happens to the lender 5 or 10 years later. This disconnect continues on and on downstream to the eventual bagholder who then wishes they had more control of the process (which in turn, often means control of incentives!).

Admittedly, the "products" in this disaster were just bad products, but with the level of incentives that were floating around, who would want to rock the boat? Maybe it was greedy short-termism and maybe just Groupthink, but there were many, including the Chief Economist at HSBC that called this situation accurately many years ago.  This is a different league than armchair pundits like myself calling it based on the old "gut feel", common sense and a few pertinent facts, this is a pro in a top position. 

Judging by the number of £150,000+ plus cars in my town and new build houses priced in the multi-millions (popular with City of London types with families) that gravy train was a pretty nice place to be, and why not ride it until the eventual derailment?

Gareth

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Posted February 6, 2009 by Peter Thomas

Interesting thoughts and a a lot of truth in what is said here. 

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