Part 2: What Happens When Corporate Objectives And Employees’ Interests Are Misaligned?
- Employees are intrinsically motivated to influence the outcomes of their KPIs to maximize their objectives.
- Even the most prominent tech giants are not immune to objective misalignment.
- As systemic as it may be, objective misalignment can be fixed.
In our last article, we discussed how designing a Corporate Performance Management System and ensuring safety in the Artificial Intelligence domain share similar traits. Today we will share examples about what happens when employees’ interests are misaligned with corporate objectives.
It’s a sad yet not uncommon story. A company faces an organization-wide challenge. That could be anything related to productivity, process management, or revenue cycles. To alleviate the problem, the management devises a solution, which they implement with great enthusiasm. Fortunately, they start seeing an improvement in their performance soon.
Over the following months, however, something strange ensues: Unexpected costs and de-lays start piling up. Then, to their great surprise, the management finds out the new solution incentivizes employees to bend the rules to their benefit at the company’s expense.
Fabled Unintended Consequences
In today’s complex world, we can see such unintended systemic consequences in just about everything. Here are a few examples:
To reduce employee tardiness, a plant manager introduces an attendance award program. Unfortunately, while the award program reduces the average employee tardiness rate, it also inadvertently decreases the plant’s productivity. Further analysis reveals that employees “game” the program, improving their timeliness only when eligible for the award and strategically calling in sick to retain eligibility.
Another example could be a bank, which introduces a Sales per Branch metric to boost sales. Indeed, the initiative creates additional sales: but at a cost. Employees started selling products to customers who didn’t need them or couldn’t afford them. Some of the branch staff even create fake customers to open new accounts.
Or take a clerical worker, whose job is to approve department request forms. Management assigns a KPI that measures the approval cycle’s turnaround time (TAT) to increase efficiency. Soon, the worker realizes that instead of having a meeting or a phone call with requestees, he could speed up his part of the process if he rejects a request if there is an error – no matter how minute. As a result, his TAT clock would not start to tick. While his KPI shoots up, his behaviour burdens the requesting departments with constant re-submission.
In the first two examples above, plant employees and branch staff (let’s call them intelligent agents) have found a way to exploit the rules to optimize their objectives. Whereas in the last example, the clerical worker has identified that he can optimize his given objective by constantly rejecting requests without caring about the spirit of his goal.
Even The Mightiest Will Fall
Within this complex and interdependent world we live in; nobody fully understands the consequences” to others of what they are doing. That’s why no organization is immune to an unintended consequence. As you will see below, even a data-driven, multinational Tech Giant deals with predictable failures as a result.
Did you know that one Tech Giant was accused of intentionally hiring people to fire them later in the year? “Why,” you may ask. It all stems from the company’s ambition to keep the workforce fresh. As a result, the company expects its managers to lose a certain number of staff every year -either willingly or by termination. That is known as the “unregretted attrition.” In other words, it’s the number of individuals you wouldn’t mind seeing quit the firm. And this company uses unregretted attrition to evaluate managers!
Expectedly, it didn’t take the company managers long to realize that they could reach their objectives artificially by hiring employees and terminating their contracts. The unnecessary burden on HR departments, additional costs, the perception of employees, all those damages are not considered. After all, you can’t manage what you can’t measure. And apparently, the company does not measure its employer brand image while evaluating the performance of its managers.
The above table shows that when managers maximize their objectives, there will always be unexpected consequences. The Tech Giant’s situation is a direct analogy of the boat example in our previous blog post. To sum, an AI is programmed to play a boat racing game to collect as many points as possible. However, it quickly develops a strategy: instead of racing, it just turns in circles and collects bonus points.
It’s Not All Doom And Gloom
If you see people skipping the processes and rules, ask, “Why?” Employees do not actively set out to break the rules like a gang of sociopaths. Instead, if people avoid the rules, take it as a sign that the rules are not working for them. The trick is to understand what exactly is not working. Your analysis will ultimately point you towards the problems that can be addressed.
Designing a robust Corporate Performance Management System must seek to understand that each intelligent agent in the system will only rationally seek to increase its reward function. Therefore, you must conduct thorough behavioural analytics to enact the right anti-gaming policies. Ask yourself the following 2 questions when you are designing a measurement system;
- Is this measure capable of triggering gaming behaviours?
- If this measure improved, could that have a negative impact on another measure’s performance?
In our next blog post, we will introduce the Game Theory and demonstrate how you can use it to align your corporate objectives with those of your employees’
A WORD OF ADVICE
As a team of experts in those fields, we can help you in your journey with our performance management capabilities and our program and implementation support services.
To learn more about our Corporate Performance Management Analytics practice, please do not hesitate to contact us.
That said, as a team of experts in those fields, we can help you in your journey not only with our performance management capabilities but also with our program and implementation support services.
Author 1:Berç Çubukciyan
Author 2:Cahit Kükner
January 27, 2022