Incentive systems
Published Date
In the old days at a tire manufacturing site of a company that shall remain nameless, workers on the production line had a row of lights over their workstation.
Each light could be green or red, showing whether that aspect of their production process was working with full efficiency or not.
The workers took pride in getting all the lights green before the end of their shift, so that they could climb up onto the railings, where they were visible to everyone else, and have a relaxed smoke as a demonstration that they had got everything running perfectly.
It was their de facto incentive system.
The downside was that it left every aspect of their production process untended. The result?
Shortly after the next shift took over, every aspect of the process went down at the same time.
The new shift then wrestled with malfunctioning production for several hours, until they too could get all the lights green in the last few minutes of their shift—and climb up to have their smoke.
🎯The Lesson
The point is:
People will structure their behavior in response to the incentives available.
You need to be very clear in your own mind about:
- What behavior you want to encourage
- What the peripheral impact will be
🎯 In Our Income|Outcome Business Simulations:
We demonstrate fundamental financial truths about business decision-making.
- If you measure (and reward) an operation on Sales, it will increase market share—often by lowering prices and losing money.
- If you switch to rewarding Profit, the operation will make money, which is strictly Income Statement thinking. It often does this by:
- Buying efficient machines (lower unit cost)
- Bulk-purchasing inventories (lower unit cost)
- Extending customer payment terms (higher prices)
This can bankrupt you, as the cash outflow can exceed the profits.
- If you then tie the Income Statement and Balance Sheet together using Return on Assets (ROA), and reward based on that ratio, the operation may sell off assets to improve the ratio—rather than genuinely improving profits.
This often leads to short-term gains and a long-term disaster.
🎯 The Value of Business Acumen
Income|Outcome workshops are designed to improve business acumen by:
- Improving business literacy and familiarity with financial concepts
- Showing the impact of decisions across all departments
Business decisions don’t just impact the bottom line; they impact the ability of every other department to make good decisions.
Better understanding of these impacts has multiple benefits:
- Improved teamwork and cross-departmental communication
- More accurate flow of information
- Enhanced personal morale (leading to reduced turnover and absenteeism)
- Greater alignment with company-wide goals
- And, of course—increased profits.
