Incentive Design and the Law of Unintended Consequences
Unintended Consequences
🕒 3 min read
A Special Collaboration with
Desiree Grace, River Heights Consulting
Andrea Belk Olson, Pragmadik
In 1958, Mao Zedong launched the Great Leap Forward, a five-year push to turn China from an agrarian society into an industrial power. One piece of the plan was the Four Pests Campaign: wipe out flies, mosquitoes, rats, and sparrows. The sparrows made the list because they ate grain meant for people.
The entire country was mobilized against the birds. And it worked. Within a few years, sparrows were nearly gone.
Then the locusts came. Sparrows ate some grain, but mostly they ate insects. With no predator left, locusts tore through the crops. Mao reportedly imported sparrows from the Soviet Union to undo the damage, but it was too late. Tens of millions of people died in one of the worst famines in history.
Nobody set out to cause a famine. The goal made sense on paper. That's exactly the problem.
Good intentions don't protect you
No executive designs incentives to create friction between departments or reward the wrong behavior. It happens anyway. Constantly.
Take a company where Sales is on the hook for $3M in billings per region by year-end. Production is measured on cutting raw material inventory 20% and trimming labor costs 10%, also by year-end. Come November, Sales is pleading with Production to ship. Production is delaying material deliveries, refusing overtime, and encouraging the crew to burn vacation days. Both teams are doing exactly what they're paid to do. One of them has to lose, and the company loses either way.
Or take the sales leader who sets a 20% bookings growth target. He assumes his team will still protect margin. They won't. Pay people on bookings with no margin guardrail, and you get growth and shrinking profit at the same time.
Incentives don't drive goals. They drive behavior.
That distinction matters. You aren't rewarding an outcome. You're rewarding whatever actions get people paid. And if there's a shortcut, your people will find it. Your salespeople will find the loophole faster than a teenager tests a new curfew. Your purchasing and production teams will figure out how to hit the number without moving the business forward.
That isn't a character flaw. It's a design flaw. When incentives conflict across the organization, you don't have one company executing one strategy. You have several smaller companies running in parallel, each optimizing for itself.
Pressure-test your incentive plan before you pay out
Most leaders know SMART goals: Specific, Measurable, Attainable, Relevant, Time-bound. For incentives, that's not enough. Add A²:
Aligned across the organization. Does this goal work with every other department's goals, or against them?
Aligned with the strategy. If everyone hits their number, does the strategy actually move?
If your incentive plan can't clear all seven criteria (SMART + A²), it's not ready. Go back to the drawing board. Otherwise, you're just killing sparrows and hoping the locusts don't show up.
Struggling to build incentives that work in the real world? Struggling with teams that mean well but don't align with your strategy day to day?
Give us a call. We can help. River Heights Consulting works with distributors to pressure-test incentive plans so every department pulls toward the same strategy.
TL;DR
A 1958 campaign to wipe out sparrows looked sensible on paper, then the locusts came. Incentive plans backfire the same way, because people chase whatever gets them paid, even when it pits Sales against Production or trades margin for bookings. Before you pay out, test every incentive against SMART plus A²: aligned across the organization and aligned with the strategy.
About Our Collaborators
Desiree Grace is a Special Projects Consultant with River Heights Consulting and spent more than 30 years as a senior leader in electrical distribution and manufacturing. She has watched enough well-meant incentive plans hatch locusts that she now reads every new comp plan the way a farmer reads the sky.
Andrea Belk Olson is the Chief Strategy Officer and founder of Pragmadik, a
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