Charlie Munger said, “Show me the incentive, and I’ll show you the outcome.”
I learned how true that is as a divisional COO.
Our bonus programs rewarded division leaders primarily for P&L performance. The autonomy that came with it generally worked well. But occasionally, two divisions would compete, or avoid working together, because cooperation might hurt one division’s profitability, even when it helped the company overall.
An absurd outcome for the company. Perfectly rational for each division.
Incentives extend well beyond compensation, though. Career ambitions, transaction objectives, and Board expectations can all shape executive decisions, sometimes in ways no one else can see.
Picture a CEO and Board preparing to sell the company. Their priorities quietly shift toward free cash flow, preserving capital, and near-term earnings. But these plans are confidential, so the CEO keeps talking about growth and investing in new capabilities.
Then the same CEO starts rejecting investments, cutting expenses, and delaying projects that fit the stated growth strategy.
Employees are confused. Senior leaders are frustrated. The decisions look inconsistent, even irrational.
They make sense once you know how the CEO’s success is being measured. The CEO is working toward a goal the rest of the organization hasn’t been told about.
When someone’s decisions don’t match their stated priorities, ask what they may be accountable for that you can’t see.
For leaders and Boards, the question is harder. Do the incentives we’ve created lead people toward the outcomes we say we want?
Because incentives will almost always speak louder than the messages we deliver.
Photo by Jasimine Blaser on Unsplash
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